ABSTRACT
In the ordinary course of business life, companies may encounter financial problems. Companies with a poor financial status must take certain measures in accordance with the Turkish Commercial Code No. 6102 (“TCC”). For the continuity of partnership rights and the protection of the company’s creditors, the legislator has introduced measures for insolvent companies. One of these measures is the merger of insolvent companies. The merger of insolvent companies is a special type of merger and this article first explains these mergers and then provides a detailed examination of the insolvent company’s participation in the merger in relation to the doctrine.
I. INTRODUCTION
Article 139 of the TCC regulates the merger of insolvent companies with financially strong companies. Article 139/1 of TCC regulates that, “A company which has lost half of the sum of its capital and statutory legal reserves due to damages, or whose debts exceed its assets, may merge with a company provided that the latter is in possession of freely disposable equity sufficient to cover the capital loss or, if necessary, to remedy the state of excess of liabilities over assets.” In this respect, the financial situation of the insolvent company may be improved through merger. However, the merger of an insolvent company with a financially sound company may create its own problems. For example, the financial situation of the company with sound finances may deteriorate after the merger, adversely affecting the company’s creditors. Although there has been some objections, the merger does not adversely affect the insolvent company’s creditors as that company’s financial condition is covered by the equity of the financially sound company because the value of half of the sum of capital and statutory legal reserves constitutes legally bound equity capital2.
In order to prevent deterioration of the reputation of the group, within a group of companies, the company will generally participate in the merger. In addition, merger with the insolvent company may also be economically beneficial.
It may be advantageous to merge with such a company if the re-establishment of the immovable property owned by the insolvent company costs more and requires more time3. It is possible that the insolvent company is taken over or transferred. However, merger of two insolvent companies is not possible under Article 139 of the TCC.
II. JOINING THE MERGER IN CASE OF INSOLVENCY
A. Merger of Commercial Companies
The doctrine contains various definitions of merger4567. A merger can be defined as the transfer of one or more commercial companies to a newly established commercial company or another commercial company without being liquidated. As a result of the merger, the shares of the acquiring company or the newly established company are acquired by the shareholders of the company which are automatically transferred at a predetermined value.
In accordance with Article 136/2 of TCC8, the accepting company is referred to as the “transferor” and the participating company is the “transferee”.
A commercial company is a legal entity formed by one or more persons with a written contract under an appropriate title for one of the specific types of law for economic purposes. Article 124/1 of the TCC determines commercial companies as joint stock, limited, collective, limited partnership, and cooperative companies. According to the TCC, at least two commercial companies are required for a merger9.
As stated in Article 136/3 of the TCC, “Merger occurs when the shares of the transferee are acquired by the shareholders of the assignee on the basis of an exchange ratio in return for the wealth of the assignee.” Drawing attention to the issue of assets, Article 134/4 also states that “The transferee takes over the wealth of the assignee as a whole via merger”. Therefore, another condition of a merger is that the assets of the companies participating in the merger also merge10. Depending on whether the merger takes place in the form of a transfer or incorporation, either the shareholders of the transferred company must join the transferred company or the shareholders of the two companies must be recruited to a newly established company11. The merger of assets may take two forms in parallel with the merger.
B. Merger Through Acquisition
The TCC regulates the transfer of all assets and liabilities of the transferred company or companies to the acquiring company and the dissolution without liquidation as a result of a commercial company’s merger with one or more commercial companies. In contrast, with the exception of Article 141 of the TCC, this is a type of merger in which the transferred company’s shareholders continue to have shares in the acquiring company at a predetermined value. In merger through acquisition, the acquiring company acquires the assets of the transferred company or companies as a whole. Only the legal assets of the transferred companies are removed from the trade registry once the liquidation phase is complete; if the assignee is a single company, it maintains its legal existence. However, changes occur in the internal structure of the acquiring company such as an increase in capital and the number of shareholders and expansion in receivables and payables.
C. Merger Through Incorporation
Under the scope of Article 137 of the TCC, this is a merger where two or more commercial companies are dissolved without being liquidated and they transferred their assets and liabilities as a whole to another commercial company which they establish. In this merger, all the companies participating in the merger are transferred and all rights and debts of these transferred companies are transferred to the newly established and acquiring company in accordance with the principle of succession as a whole. For this reason, the capital of the newly formed company is the sum of the assets of the transferred companies which ended by joining the merger. In this type of merger, which is also called full merger, companies participating in the merger are dissolved but not liquidated12.
D. Insolvency
1. The Concept of Insolvency
The concept of insolvency is defined under the preamble of Article 376 of the TCC. According to the preamble.
Where the creditors cannot collect their receivables, i.e., the company cannot meet its debts and obligations, the company will be considered in ‘insolvency’.
The preamble suggests the following conditions in which insolvency may occur: (i) annual balance sheet, monthly, quarterly or semi-annual reports; (ii) the auditor or early identification committee reports; and/or (iii) management and the determination of the board of directors. In case of such matters, the board of directors will issue an interim balance sheet to the auditor, which is based on the continuity principle of the business as well as the on-going value of the assets. The interim balance sheet determines whether or not the board of directors is required to file a bankruptcy notification to the court of first instance.
The preamble also states that Article 376 of the TCC includes a new change that could eliminate the obligation to apply to the court. It states that there is no need for notification of bankruptcy of the company provided some of the company’s creditors accept in writing that their receivables will be ranked after all other creditors.
2. Determination of Insolvency
According to Article 376/313, if there are signs that the company is in insolvency, the board should prepare interim balance sheets. Where the assets are not sufficient to cover the debts (the company being insolvent), the board shall notify this situation to the Commercial Court of First Instance where the headquarters of the company is situated and request declaration of bankruptcy.
There is another issue that needs to be address at this point. It is unclear whether there is still an obligation to notify the court about the insolvency under Article 376 of the TCC for an insolvent company that can merge with another company. Other than the approval of the ranking agreement by experts, which is stated under Article 376/3, there is no other provision as to whether an insolvent company is obliged to notify the court. It states that the obligation to notify the court may be delayed as long as there are concrete indications of a merger with a company that has good financial standing. This is because a merger with a financially sound company should also be considered a recovery plan, in which case delaying notification to the court is valid14.
3. Merger of an Insolvent Company
Article 139 of the TCC regulates the possibility of a company that has lost a certain amount of capital or is insolvent may participate in a merger, and that such a merger (merger for restructuring) is permitted. The decision to embark on such a merger may convince the court to postpone termination of the company. Although the decision to merge does not relieve the management body of its obligations under Article 376, we are of the opinion that the delay in notification to the court should be regarded as an exception in cases where a merger with a company with good financial standing can be concretely demonstrated.
The presence of an adverse or over-indebted balance sheet does not preclude the merger of a company; however, it is required that the acquiring company has freely disposable equity capital to cover this deficit. “Freely Disposable Equity Capital” is the sum of the capital reserves that are not subject to a specific expenditure. The notion of capital should be construed as basic capital and issued capital. In the event that an insolvent company participates in a merger, the total amount of freely disposable capital reserve should be sufficient to eliminate the financial indebtedness. “The conditions stipulated as a merger requirement under article 139 of the TCC, do not in any case result in the fact that the company after the merger is not insolvent or the balance sheet does not show loss of capital reserve. In this respect, in order to protect the beneficiaries of the merging companies, it should be considered an additional condition that the company after the merger does not suffer from the loss of capital reserve or insolvency.” In mergers where the shareholders of the insolvent company do not waive their shareholding rights, the shareholders of the insolvent company will be given or will continue to hold shares in the acquiring company. For insolvent companies where the shares have zero or negative value, after the merger decision to be taken with the quorums pursuant to Article 151 of the TCC, we assume that the shareholder should not be issued any shares, and where the company taking over is already insolvent, the shareholders should not continue in the acquired company. No squeeze out fee should be paid for shares that have zero or negative value15.
Those (minority) shareholders who object and cast a negative vote to the merger decision on the basis that it violates the principle of good faith, may file an action for nullity in accordance with the provisions. Where an insolvent company happens to be a jointstock company or limited liability company taking part in the merger and where articles between 136 and 158 of the TCC are not violated, no action for nullity may be filed by the shareholders of a company participating in merger under Article 192 of the TCC.
III. CONCLUSION
An insolvent company may merge with a company that has freely disposable equity capital to the extent that it is able to eliminate the financial indebtedness. This merger can be realized through acquisition or by way of establishing a new company. However, no two companies that are insolvent can merge. It is required that the company with good financial standing should have enough funds to cover the financial indebtedness. In addition to this, it should not be forgotten that the financially sound company should not become insolvent after the merger. Otherwise, the shareholders of the company with good financial standing may pursue compensation for losses incurred as a result of a merger with a company that is so insolvent that it has negative value debts that has no chance of recovery.
BIBLIOGRAPHY
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FOOTNOTE
1 Official Gazette dated 14/02/2011 and numbered 27846.
2 Prof. Dr. İsmail KIRCA/ Dr. Murat GÜREL, Prof. Dr. Hikmet Sami Türk’e Armağan (Sermaye Kaybı Veya Borca Batıklık Hâlinde Birleşmeye Katılma) (Armağan), (Ankara 2017) p. 464
3 Kırca/Gürel, Armağan p. 465.
4 Meral Eker Turhan, 6102 Sayılı Türk Ticaret Kanunu Çerçevesinde Anonim Şirketlerin Devralma Yolu İle Birleşmesi (Birleşme), (İstanbul 2014), p. 9.
5 Ünal Tekinalp, Sermaye Ortaklıklarının Yeni Hukuku, (İstanbul 2015), p. 609.
6 Turhan, Birleşme s. 8’den naklen DOMANİÇ, Hayri: Türk Ticaret Kanunu Şerhi, C. II, Anonim Şirketler Hukuku ve Uygulaması (Anılış: C. II), (İstanbul, 1988), p. 1497.
7 Mehmet Bahtiyar, Ortaklıklar Hukuku, (İstanbul 2019), p. 63.
8 Article 136 – (1) Companies can be merged in two ways: a) Acquisition of a company by another company, technically called “merger by acquisition,” or b) Union of two companies under a new company, technically called “merger by formation of a new company”. (2) In the application of Articles 136 to 158, the company accepting the merger is called “transferee” and the company that is joined is called “assignee”. (3) Merger occurs when the shares of the transferee are acquired by the shareholders of assignee on the basis of an exchange ratio in return for the wealth of assignee. The merger contract can include cash payment for withdrawal, as stated in Article 141, paragraph 2. (4) The transferee takes over the wealth of assignee as a whole via merger. The company merged by acquisition collapses and is deregistered from Trade Registry
9 Turhan, Birleşme p. 11.
10 Turhan, Birleşme p. 12.
11 Turhan, Birleşme s. 24’ten naklen Türk, Hikmet Sami Ticaret Ortaklıklarının Birleşmesi, Ankara 1986 p. 81-82; Doğanay, İsmail Türk Ticaret Kanunu Şerhi Cilt I, 4. Baskı, (İstanbul, 2004), p. 659, Al Kılıç, Şengül, Türk Ticaret Kanunu Tasarısına göre Ticaret Şirketlerinin Birleşmesi, (İstanbul, 2009), p. 22.
12 Turhan, Birleşme p. 45.
13 If there are signs indicating that the company is in insolvency the board should prepare interim balance sheets based on the principle of continuity of the business and fair market value of the assets. If, pursuant to the report, it is determined that the assets are not sufficient to cover the debts, then the board shall notify this situation to the commercial court of first instance where the headquarters of the company is located and request declaration of bankruptcy of the company unless the creditors of the debts, with an amount covering the company deficit and remedying the insolvency, accept in writing prior to the bankruptcy decision that their debts may be deferred after all other creditors are satisfied; and the accuracy and validity of such a statement is verified by the experts appointed by the court to which the bankruptcy request will be made. Otherwise, the application filed to the court for expert review shall be accepted as a bankruptcy notice.”
14 Kırca/Gürel, Armağan s. 470’den naklen Kayar, İsmail: “Yeni TTK’ya Göre Anonim Şirkette Sermaye Kaybı ve Borca Batıklığın Tespiti ve Sonuçları”, 6102 Sayılı Yeni Türk Ticaret Kanunu’nu Beklerken 10-11-12 Mayıs 2012 Sempozyum, MÜHFHAD 2012, v. 18, n: 2, p. 655; Türk, Ahmet, “Anonim Ortaklıkta Borca Batıklık ve İflâsın Ertelenmesi Konusunda 6102 Sayılı Türk Ticaret Kanunu ve Yürürlük Kanunu ile Getirilen Yenilik ve Değişiklikler” Batider 2016, C. XXXII, N: 1, p. 28.
15 Kırca/Gürel, Armağan p. 481.
