Abstract
In the capital stock companies, merger can be realized through acquisition or new establishment. All the process until the submission date of the merger agreement and merger report for approval of the general assembly is conducted by the board of directors. The board of directors prepares all documents including aforementioned agreement and report and convenes the general assembly of company for a meeting. The Turkish Commercial Code numbered 6102 (“TCC”) has brought some novelties regarding mergers and acquisitions as well as other numerous fields. One of those is the participation of companies that are in the status of capital loss or insolvency to merger transaction under specific conditions. Another novelty is the facilitated merger which exempts some procedural obligations in mergers transactions that the capital stock companies’ control is centrally collected. Demands in practice are responded to some extent with those novelties made in the TCC.
I. INTRODUCTION
Mergers and acquisitions are the transactions realized in order to change the control of commercial companies. Merger within the scope of the Turkish Commercial Code numbered 6102 (“TCC”) occurs through a merger of two (2) companies under a new company or acquisition of a company by another one 1.
Merger is regulated in between the articles 136 and 158 of the TCC in detail, since merger transaction may affect not only companies participated in merger transaction but also other third parties
In this article, firstly, types of mergers will be explained, afterwards processes/procedures regarding merger transactions and their details will be stated. After analyzing the merger transaction in general, facilitated merger procedure, which is a custom type of merger and can be conducted if some conditions are fulfilled, regulated in article 155 and 156 of the TCC will be analyzed. Since mandatory implementation of some obligations stipulated for mergers is eliminated in facilitated mergers, processes of this kind of mergers can be implemented more quickly than the other merger processes.
II. TYPES OF MERGER
A. In General
Merger of commercial companies occurs by way of merging the assets or businesses in terms of economy 2. Therefore, a single company that has the joint asset emerges as a result of such acquisition.
Pursuant to Article 136 of the TCC, companies can be merged through an acquisition of a company by another one, technically called merger through acquisition, or merging under a new company, in other words merger through new establishment. Legal processes and results that need to be realized for both two methods are indicated below respectively.
B. Merger through Acquisition
One of the companies becomes property of the other company and loses its legal personality by the way of this acquisition method defined in the TCC as “acquisition of a company by another one”. Pursuant to last paragraph of Article 136 of the TCC, the assignee company loses its legal personality and the transferee company takes over the assets of assignee with its actives and passives as a whole. Pursuant to article 142 of the TCC, the transferee company is obliged to increase the company capital to the required level so as to protect the shareholders’ rights of the assignee company. In this regard, new shares are issued and mentioned shares are given to the owners of the assignee company3.
C. Merger through New Establishment
This acquisition method is indicated in Article 136 of the TCC as “Companies can be merged through a merger of two companies under a new company, technically called merger through new establishment.” In this method, both the transferee and the assignee company lose their legal personalities and thus newly established company takes over the rights, obligations and assets of both the transferee and the assignee company as a whole. As a result of merger through new establishment, shareholders of companies participated in merger become a shareholder automatically (ipso iure) in newly established company at the rate of their participation shares 4.
III. MERGER PROCESS
In practice generally, managing bodies of companies that desire to carry out a merger transaction, primarily make a decision towards initiating the merger process. Afterwards, as soon as the process is initiated, relevant documents are prepared and procedures are implemented. All the process until the submission date of merger agreement and merger report for approval of the general assembly is conducted by the managing board. Boards of directors of companies simultaneously prepare announcements regarding inspection right indicated in Article 149 of the TCC and apply to the related trade registry for these announcements to be published, prepare all documents including merger report and merger agreement and convene a meeting of general assembly. In this part, some critical issues regarding the aforementioned process will be examined.
A. Inspection Right
The TCC has adopted principle of transparency in mergers and acquisitions. Inspection right also serves this principle. In this regard, by each of the companies participating in merger, some documents that are in the scope of the TCC are obliged to be hold open for inspection of shareholders, dividend right certificates holders, holders of security certificates that are issued by the company, persons who have benefits and other related persons at headquarters or branches of the mentioned companies thirty days prior to the general assembly meeting in which the merger transaction will be under discussion. Such documents are stated in Article 149 of the TCC and these are; merger agreement, merger report, year-end financial statements of the last three years, annual activity reports and if necessary, interim balance sheets.
B. Interim Balance Sheet
Interim balance sheet is another type of inspection right which is granted to shareholders of the company and regulated as a result of transparency principle adopted by the TCC. That is to say, there might be a long period of time between the date of last balance sheet and the execution date of the merger agreement. It is regulated in Article 144 of the TCC that should this time period exceeds six months or substantial changes have occurred in the assets since the last balance sheet date, companies are obliged to submit an interim balance sheet in order to procure that appropriate decisions are adopted by shareholders and related persons in terms of the current information.
C. Merger Agreement
Pursuant to Article 145 of the TCC, written merger agreement shall be executed in both merger through acquisition and merger through new establishment. Execution of the merger agreement in written format is a validity condition, and therefore a merger agreement which is not executed in written format cannot be valid and registered. The agreement shall be signed by the managing bodies of companies that are participated in merger and it shall be approved by companies’ general assembly. A merger agreement will not enter into force until the date of general assemblies’ approval and agreement will be pending until the date of approval.
Mandatory components of this agreement are indicated in Article 146 of the TCC. The content hereby does not restrict the components that merger agreement can comprise. It indicates the minimum mandatory content as it is stated by article’s justification. Mandatory components that are obliged to be included in the agreement are stated below:
i. Trade names, legal types and headquarters of the companies that have participated in merger; in the case that the merger is made through new establishment, type, trade name and headquarter of the new company.
ii. Exchange rate of the company shares, if it is specified, equalization price; explanations regarding assignee company’s shareholders’ shares and rights in the transferee company
iii. Rights that the transferee company granted to the shareholders who have privileged and non-voting shares and to the holders of divided right certificates.
iv. Form of the alteration of the company shares
v. The date that shares acquired through merger entitled to the right of the balance sheet profit of transferee or newly established company and all particulars regarding this claim.
vi. When required, the squeeze-out fee which will be determined in accordance with Article 141 of the TCC
vii. Date of the transactions and actions of the assignee company that will be deemed to be conducted for the account of the transferee company.
viii. Special benefits granted to the managing bodies and managing partners.
ix. When required, names of unlimited liable shareholders.
D. Merger Report
Merger report is prepared in order to inform shareholders regarding risks, features and possible benefits of mentioned merger and procure that shareholders fully understand such risks, features and benefits and vote accordingly after the execution of the merger agreement by managing body and before the approval of merger in the general assembly meeting. Merger report serves the purpose of providing transparency to the companies. As stated above, transparency principle in the TCC does not only protect shareholders’ interests, but also serves illumination of the company employees and some third parties 5. Thus, shareholders, who will approve the merger or not, can have a better understanding of which circumstances the benefits of employees and the shareholders will be protected and can also conduct required inspections. The merger report can be prepared severally or jointly by the board of directors of all the companies participating in the merger. Pursuant to Article 147 of the TCC, the mandatory contents that are required to be involved in the merger report and to be explained in the merger in terms of economic and legal aspect are as indicated below:
i. Purpose and results of merger
ii. Merger agreement
iii. Exchange rates of the company shares and if it is determined, equalization payment; shareholder rights that are granted to the shareholders of the transferee company by the assignee company
iv. When required, the amount of the squeeze-out fee and the reasons for providing squeeze-out fee instead of providing company shares and shareholders rights,
v. Features regarding valuation of the shares in terms of determination of the exchange rate.
vi. The amount of capital increase that will be made by the transferee company when required.
vii. If it is specified, information on additional payment and other personal performance liabilities and personal responsibilities to be imposed to shareholders of the assignee company due to merger.
viii. In mergers of different types of companies, the obligations imposed to the shareholders due to the new type.
x. Merger’s effects on the employees of the companies participating in the merger and if possible, content of a social plan.
x. Merger’s effects on the creditors of the companies participating in the merger.
xi. If required, reasons and the explanations regarding the approvals granted by the related authorities.
E. Discussion of the Merger Agreement in General Assembly Meeting and Approval of the Merger Resolution
As it is mentioned above, merger decision is approved by the general assembly. As per the Article 151 of the TCC, the approval of the merger resolution is subjected to a special quorum. Since joint stock company is the most common company type in practice, it is useful to explain shed some light on the subject in terms of this company type. Pursuant to Article 151/1 (a), two-graded quorum is required in joint stock companies. Pursuant to this article, affirmative votes must represent both the majority of capital and the three quarters of the existing votes in general assembly. In this respect, quorum for meeting equals to the half of the shares composing the capital. In other words, three quarters of the shares represented in general assembly shall vote affirmative and also these affirmative votes must at least equal to the half of the company capital.
IV. SPECIAL SITUATIONS
A. Participation of a Company in Liquidation in Merger
Pursuant to Article 138 of the TCC, in spite of the fact that it is possible for companies in liquidation to participate in merger, two conditions are determined for these companies’ participation in merger. First condition is that the distribution of assets has not commenced which is regulated in Article 548 of the TCC and required for resolution regarding revocation of liquidation. Second condition is that the company in liquidation must participate in merger transaction as an assignee company. Pursuant to paragraph 2 of Article 138 of the TCC, fulfillment of these conditions shall be proven through the documents submitted to the trade registry which the transferee company’s headquarter is registered to. In practice, this situation is proved with the report of an independent accountant, financial advisor or sworn financial advisor.
B. Participation of the Companies that are in Capital Loss or Insolvency in Merger
Pursuant to Article 139 of the TCC, companies that are in capital loss or insolvency are allowed to participate in merger. In order to clarify the subject, concepts of capital loss and insolvency shall be touched on briefly
The subject of authorizations of the board of directors in the case of a capital loss or insolvency is regulated in Article 376 and 377 of the TCC. Pursuant to Article 139 of the TCC, capital loss is described as losing the half of capital and legal reserve due to the losses. Insolvency means that the company’s assets are insufficient to cover the company’s debts. Although the board of directors must apply to the commercial court of first instance in case of insolvency as per Article 376 of the TCC, legislative allows the “remedial mergers” with the justification of law’s statement6. As long as the required condition is fulfilled, there is no impediment for companies in these two (2) situations to also merge with a company. The condition in question is that the other company participating in merger shall have sufficient amount of freely disposable equity capital to cover the lost capital or eliminate the insolvency. In practice, this situation is also proved with the report of independent accountant, financial advisor or sworn financial advisor.
V. FACILITATED MERGER
Pursuant to Article 155 of the TCC, in mergers where the capital stock companies’ control is centrally collected or highly centered, the legislator exempted the companies from some procedural obligations. Provisions regarding facilitated merger can be applied with the existence of three different possibilities.
First possibility in the aforementioned article is that the assignee company has all the shares that grant voting right of the transferee company. Second possibility is that a company or a real person or a group of persons connected because of law or a contract has all the shares that grant voting right of the companies participating in the merger. Third possibility is that the assignee company has at least 90% of the shares that grant voting right.
In first two assumptions set forth in the TCC, the control is wholly held by one real person or legal entity. However, in the third assumption, almost 90% control is in question. These provisions aim to make sure that the persons who conduct this merge transaction also be the ones who are affected by the merger transaction, while the companies that are in control of the similar, and even mostly the same persons, and thus the rights within the scope of transparency principle such as the inspection right to not needed anymore. In the cases of 90% of control rate, the additional protections have been provided to minority shareholders.
In the first two situations regulated in the law, it is sufficient for companies participating in merger to only regulate the company information stated in Article 141/1 (a), squeeze out fee, the date on which the transactions are deemed to be realized on the account of transferee company and special benefits to be granted to the managing body in merger agreement. Furthermore, companies participating in merger are not obliged to prepare a merger report or provide an inspection right. Parties are not obliged to submit the merger 7 agreement to the general assembly for approval and it is sufficient for the managing bodies to take a decision regarding the approval of merger agreement provided that company capital will not increase as a result of the merger.
Some additional obligations are regulated for the facilitated mergers to be performed in accordance with the third assumption indicated in Article 155 of the TCC.
These are the obligations of proposition of the squeeze out fee to the minority shareholders and not imposing an additional obligation which are regulated in the second paragraph of the provision. If these conditions are fulfilled, the aforementioned companies can merge in a facilitated way. In that case, companies are obliged to fulfill the inspection right properly.
VI. RESULTS OF MERGER
Merger becomes legally effective through the registration of merger agreement. If there is a company which was acquired or the merger is occurred through new establishment, the first result of registration is dissolution of these companies automatically without entering a liquidation process. Dissolved (acquired) company’s asset is taken over by the transferee company as a whole (through universal succession) in accordance with the Article 136 of the TCC. After the merger becomes legally valid, creditors of company can make a claim to secure the receivables by the transferee company within three months according to the Article 157 of the TCC. Pursuant to fourth paragraph of the same article, if the other creditors are not damaged, the transferee company can directly pay the receivables instead of providing a security. It must be emphasized that, the legislator has not granted the creditors a right to prevent the merger7 but in accordance with Article 193 of the TCC, it has granted the right to bring an action after the merger transaction. In both two situations, when merger occurs, merging companies’ legal personality ends without liquidation and such companies are deregistered from the trade registry.
VII. CONCLUSION
Mergers and acquisitions are the transactions which are complex in terms of judicial aspect and significant and risky in terms of economical aspect. Therefore, despite the detailed regulations in the law, both pre-merger and merger process will be difficult for the parties.
In response to this situation, legislator provides some procedural facilities provided that some conditions are fulfilled. Although opportunities provided in law responds to some extent to the current demands in practice, the subject prompts parties to act cautiously due to its legal complexness and the reason that it has a considerable risk in terms of economical and operational aspects.
BIBLIOGRAPHY
Hasan Pulaşlı, Şirketler Hukuku Şerhi, Ankara 2014
Hüsnü Turanlı, Yeni Türk Ticaret Kanununa Göre Ticaret Şirketlerinin Birleşmesi, Izmir 2014
Oruç Hami Şener, Teorik ve Uygulamalı Ortaklıklar Hukuku, Ankara 2012
FOOTNOTE
1 TCC Art. 136.
2 Hasan Pulaşlı, Şirketler Hukuku Şerhi, Ankara 2014, p. 127.
3 The exception to this situation is squeeze fee, and the regulation about squeeze fee is in Article 141 of the TCC. Accordingly, companies participating in merger can grant a right to shareholders to make a selection between having shares and shareholder rights in the transferee company or having squeeze out fee equal to the value of the assignee company’s shares in this regard.
4 Hüsnü Turanlı, Yeni Türk Ticaret Kanununa Göre Ticaret Şirketlerinin Birleşmesi, Izmir 2014, p. 56.
5 Turanlı, p.153.
6 TCC Art. 139.
7 Oruç Hami Şener, Teorik ve Uygulamalı Ortaklıklar Hukuku, Ankara 2012, p. 129.
