ABSTRACT
A merger is a situation in which two or more companies are gathered under the roof of a single company and the shares of the new company are given in exchange for the shares owned by the partners in the companies. The purchase of a majority of the shares of a different firm by a company is also called an acquisition.
Although the terms merger and acquisition are used together in literature, these terms appear as different actions from each other. And while these actions are being carried out, disputes arise between the parties.
In this study, the process of company acquisitions is divided into stages; first of all, the legal disputes that may arise from the point of view of the parties in terms of confidentiality agreements; secondly, letters of intent; and thirdly, similar structures that were raised before the final contracts during the preparation phase will be addressed. Afterwards, the next serious phase for the parties, due diligence, and then the share purchase agreement, which is one of the basic contracts, are discussed and the issues that may cause legal disputes between the parties and their solutions are examined. In the last stage, which is when the acquisition and closing transactions are made, the seller’s warranties on liability, penalty clause, third party claims, contract price and burden of proof issues will be evaluated as the cause of legal dispute between the parties.
In this article, the process of company acquisitions is divided into stages; first of all, the legal disputes that may arise from the point of view of the parties in terms of confidentiality agreements; secondly, letters of intent; and thirdly, similar structures that were raised before the final contracts during the preparation phase will be addressed.
I. INTRODUCTION
Company acquisitions occur when one or more commercial enterprise or commercial company transfers its assets to a different commercial company, or when two different companies transfer their assets to a potential commercial company to be established in the same way1. In terms of Competition Law2, this is one of the transactions that businesses are turning to as competition between businesses is rapidly increasing in today’s world, and it has become more important for the businesses to increase their market value accordingly3. These transactions are one of the restructuring methods often resorted to by parties that want to increase their share in the market by collaboration, or want to buy out and take ownership of the majority of the shares of small businesses which continue their activities in the market and have a minor market share4.
There are no specific behavioral obligations for the parties in acquisitions. But even though there are no such obligations, it is obvious that the parties must act within the framework of good faith. If they exceed this framework, it is inevitable that conflicts shall arise between the parties. And in merger and acquisition transactions, disputes are frequently encountered.
The acquisition process, as a whole, consists of many stages; such as the preparation stage, the due diligence stage, the stage where the main agreements are negotiated and signed, and finally, the closing stage where the transfer transactions are made. The legal disputes that may arise between the parties also vary according to the stage.
II. FINAL CONTRACTS / DISPUTES AT THE PRE-SIGNING PHASE
A. Confidentiality Agreements
The pre-contracts stage is the first step of acquisitions, which is a legal process from beginning to end. At this stage, also called the preparatory step, the first steps are taken between the buyer and the seller. While these steps are being taken, confidentiality agreements, letters of intent, and similar structures that may be the subject of legal disputes between the parties occur5.
Confidentiality agreements are the first legal documents to be signed before negotiations, aiming to ensure that the seller provides information about the business to the poten tial buyer and that this information is kept confidential throughout the entire process6. In these contracts, legal disputes may arise on issues such as who will be responsible if the information given about the company, which is the subject of the documents, is not correct, which information will remain confidential and will be prevented from being leaked to third parties, and if the parties violate the exclusivity and confidentiality provisions. These legal disputes that arise can be resolved according to the law agreed by the parties, and the fact that the contracts are arbitrable provides an additional option to the parties in terms of resolving the legal disputes that arise.
B. Preliminary Interviews Phase and Letter of Intent
The letter of intent is a legal document with limited effect that determines the order in which the process from the confidentiality agreement to the signing of the final agreements will be carried out, and declares that the intentions of the parties regarding the acquisition have become serious. Legally binding letters of intent are shaped within the framework of the provisions that will be included, such as confidentiality, exclusivity, and contractual provisions regarding the binding effect. In this regard, in case of violation of these binding obligations, disputes may arise between the parties, and the party that has suffered due to violation of the agreements may claim compensation for the damage. The resolution of these legal disputes varies depending on whether the provisions are binding or not.
In the letter of intent stage, unlike the other stages, the process of legal examination of the company that is the subject of the contracts by the potential buyer is called “due diligence”. Although it is in the parties’ discretion, whether the provisions in the letter of intent are binding, “culpa in contrahendo” responsibility still arises in case of one of the parties acting with a bad faith in a way that will damage the other party and cause legal disputes, whether the provisions are binding or not7. In this case, the parties, by acting in accordance with their obligations of diligence while fulfilling their debts, will be able to prevent legal disputes that may arise between them at the said stage.
III. DISPUTES DURING DUE DILIGENCE
The due diligence stage is a process that occurs once the parties have become more serious. The seller clearly reveals the status of the company by sharing legal, tax, and environmental information regarding the company to the potential buyer in accordance with the confidentiality agreement and letter of intent. In addition, this is a legal review process that does not have any regulations in the Turkish Code of Obligations (“TBK”) and the Turkish Commercial Code and is indispensable for the parties8. At this stage, if the parties violate the rights they have granted each other within the letter of intent, breach of the contract may occur, as the negotiations of the parties may not always end in a positive way. As mentioned in the subheading above, whether the provisions the parties have included in the letter of intent are binding or not varies both in terms of the problems that will arise in the event of a violation of the letter and in terms of solutions. However, regardless of whether the provision is binding or not, a “culpa in contrahendo” liability will arise if one of the parties acts in bad faith and causes legal disputes by causing harm to the other party.
Culpa in contrahendo refers to the obligations agreed upon in negotiations in which a contract-like trust relationship arises between the potential buyer and seller prior to the signing of contracts. For example; it is a type of responsibility that can be applied in the event that one of the parties acts against the rules of honesty and in a way that will cause damage to the other party, as a result of any party’s faulty behavior (giving false information, not disclosing facts, avoiding information, etc.) during the negotiations. In the event of contradictions in the issues agreed on by the parties during the pre-contract negotiations, situations may arise that could impose liability for the failure to complete the acquisition agreement and the provisions of the tort, which may result in legal disputes9.
IV. DISPUTES DURING THE SIGNING PHASE OF THE SHARE PURCHASE AGREEMENT
At this stage, negotiations are carried out in accordance with the reports obtained through due diligence made at the previous stage, and the most discussed issue in signing the contract is the precendents and obligations set out by the representation of the parties10. In this case, before the contract is signed, legal disputes arising may be likely, provided that the preconditions agreed upon by the parties are not fully and duly met. For instance; the parties may not fulfil the necessary conditions in accordance with the issues they have undertaken or result that the parties faced at the closing stage may not be satisfactory even if the parties fulfilled their obligations. Or the parties may not have fulfilled their responsibilities in order to create the necessary conditions or potential buyer may not satisfied with the legal review and audit process after the signature. Another problem is the amendment clauses in the merger and acquisition agreements added by the party who does not want to incur losses from the issues that may hinder the process between the signing of the contract and the closing stage11. In terms of the assurances these clauses will provide to the parties, which cover the conditions to be determined as a result of due dilingnce process conducted during the contract negotiations parties may be able to prevent legal conflicts that may arise, by eliminating the uncertainties that may cause problems in the future.
V. DISPUTES DURING ACQUISITION TRANSACTIONS AND CLOSING PHASE
The acquisition does not end with the signing of the target company’s share purchase agreement between the buyer and the seller, the shares must be transferred to the buyer. The closing stage is the last phase in which the contractual acts are performed with the transfer of the shares of the target company to the buyer with disposotive transactions12. At this stage, it should not be forgotten that many transactions are made in addition to the disposotive transaction because it is these transactions that are the reason for the emergence of many conflicts at this stage. Since this stage is the last stage for the parties, there is a greater variety of issues that may lead to conflicts compared to other stages. Therefore, we will try to explain the issues that may cause conflict under the headings below.
A. Seller’s Liability for the Defect
In acquisitions, a share purchase agreement is signed between the parties regarding the transfer of the company. 13 In this case, the seller’s liability for the defect will arise in the event of the occurrence of a defect other than that represented or warranted in regardsto the target company that is the subject of the contract. The situation in which the liability for the defect will arise is regulated in the TBK in article 219; “The seller is not only responsible for the absence of the qualities he has declared to the buyer, but also for the presence of material, legal or economic defects that affect the quality or are contrary to the quantity, eliminating or significantly reducing the value for the use and the benefits expected from it by the buyer”. On the other hand, the liability of guarantee against the defect is regulated in the TBK from Article 219 to Article 231, and for the emergence of liability for the defect pursuant to these articles; (i) the defect should exist before the damage has passed to the buyer (ii) the buyer should fulfill the inspection and notification obligations (iii) the defect should be substantial and hidden (iv) the nonliability agreement should not be signed between the buyer and seller regarding the liability for the defect, in favor of the seller. If these conditions are present, in addition to the dispute of the seller’s responsibility for the defect that will arise, the conflict may also arise as to which of the alternative rights granted to the buyer in TBK Article 227 should be used. These alternative rights are; (i) rescission of contract, (ii) requesting a reduction in the sales price at the rate of defects (iii) repairment of the sold item (iv) replacement of the defective item with a non-defective one. Here, the parties may also enter into an agreement with provisions that release the seller under TBK Article 221. This agreement continues to be valid in cases other than the seller’s gross fault. 14 In this case, conflicts may also occur between the parties in terms of the liability of the seller. The emergence of the said conflict depends on the agreement of the parties, taking into account every possibility in terms of provisions that eliminate the liability of the seller.
B. Penal Clause
If the debtor does not fulfill his/ her main debt duly or at all, the ancillary performance that will occur with the violation of the debtor, depending on the main debt, is called the penal clause. 15The penal clause carries a risk from the seller’s point of view as the creditor will receive the amount in question, even if he/ she cannot prove the loss suffered in the event of a breach of the debt. In this respect, since legal disputes may arise between the parties regarding the subject of this clause, the emergence of a conflict between the parties will be prevented if both parties agree in advance on the ideas that have emerged by considering all the possibilities in their favor in detail.
C. Third-Party Claims in Transfer
It was stated that disputes may arise as a result of the violation of the representations and warranties of the parties in the takeover process. In this case, legal disputes will inevitably arise between the parties, since the claims made by the third parties in terms of the target company may be in a way that may cause the violation of the seller’s representations and warranties. 16It should also be noted that third-party claims also differ if they are made against the transfer of a commercial enterprise or the transfer of shares. For example, in a resolution of a dispute between the target company and a third party, if the relevant party requests to solve the dispute without taking it to court, problems will occur regarding whether the seller should be aware of the existence of this request and whether the seller can intervene in the dispute between the third party and the target company, even if he/ she is aware of it. In this respect, the parties will be able to prevent such problems with the provisions they have determined in the contract in detail.
D. Contract Price
One of the most common takeover disputes is disputes over the price of the subject of the contract. In such disputes, the seller determines the value of the subject of the contract according to his/ her own calculations and reveals an amount. The buyer, on the other hand, claims that the amount of the price determined as a result of these calculations is high on the grounds that it does not match his/ her own calculations and is excessive. Instead of risking the termination of the takeover process by causing disputes to come to the agenda, as in this case, the parties will be able to prevent disputes by deciding on alternative ways to be followed in various possibilities at the previous stages while determining the price in question.
E. Burden of Proof
Article 6 of the Turkish Civil Code states, “Unless there is a contrary provision in the law, each party is obliged to prove the existence of the facts on which it bases its right”. According to this regulation, the burden of proof is on the requester. The concept of the burden of proof plays an important role in the acquisition process, as there are too many disputed matters. Here, the situation that bears the burden of proof for the post-closing period, which party bears the burden of the disputes between the parties, which party should prove which issue in what way may arise as a dispute, and if the parties make the determination of the means of proof and the structuring of the burden of proof at an early stage, they will prevent the emergence of such conflicts17.
VI. CONCLUSION
As a result, it is quite normal for companies to want to make acquisitions within the scope of their growth targets. However, because the takeover transactions have many legal pillars, it is evident that there is a possibility of legal disputes between the parties during the implementation of the said transactions. In this regard, one of the purposes of the parties should, first of all, be to determine the provisions that will prevent the emergence of any conflict that may arise between them in a way that will not leave any room for doubt by foreseeing the previous stages, and should be added to the contract.
BIBLIOGRAPHY
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FOOTNOTE
1 Hasan Pulaşlı, Şirketler Hukuku Genel Esaslar, Ankara 2020, p. 71.
2 Helin Berfin Akyüz, Türk Rekabet Hukuku Kapsamında Şirketlerde Birleşme ve Devralmalar, Ankara 2007, p. 33.
3 Serpil Altınırmak Gökbel, “Birleşmelerde Başarı ve Başarısızlık”, Ed. Haluk Sumer/ Helmut Pernsteiner, Şirket Birleşmeleri, İstanbul 2004, p. 214.
4 Esra Kayandan, Birleşme ve Devralmalarda İnceleme Prosedürü (Due Diligence), İstanbul 2022, p. 1.
5 İsmail G. Esin, Birleşme ve Devralmalar, 3. Edition, İstanbul 2021, p. 44.
6 Esin, p. 45.
7 Lara Candoğan, Şirket Birleşme ve Devralmalarında Ortaya Çıkabilecek Uyuşmazlıklar, (Date of Access: 04.06.2022) https://www.mondaq.com/ turkey/shareholders/1176580/350irket-birle351me-ve-devralmalarda-ortaya-305kabilecek-uyu351mazl305klar-.
8 Mustafa Arıkan, Due Diligence Kavramı ve Şirket Birleşme ve Devralma Sözleşmelerinde Satıcının Sorumluluğu Hakkında TBK Hükümleri Çerçevesinde Değerlendirmeler, MÜHFHAD, V. XXII, N. 1, 2016, p. 265.
9 Candoğan, Şirket Birleşme ve Devralmalarında Ortaya Çıkabilecek Uyuşmazlıklar, (Date of Access: 04.06.2022) https://www.mondaq.com/ turkey/shareholders/1176580/350irket-birle351me-ve-devralmalarda-ortaya-305kabilecek-uyu351mazl305klar-.
10 Merve Çek, Birleşme-Devralma İşlemleri Çerçevesinde “Due Diligence ve Engagement Letter”, Yüksek Lisans Tezi, İstanbul 2021, p. 50.
11 Candoğan, Şirket Birleşme ve Devralmalarında Ortaya Çıkabilecek Uyuşmazlıklar, (Date of Access: 04.06.2022) https://www.mondaq.com/ turkey/shareholders/1176580/350irket-birle351me-ve-devralmalarda-ortaya-305kabilecek-uyu351mazl305klar-.
12 Çek, p. 52.
13 See Section IV.
14 Vedat Buz, Ortaklık Paylarının Devrinde Ayıba Karşı Tekeffül Hükümlerinin Uygulanabilirliği Sorunu, BATİDER, V. 35, Iss. 3, p. 72.
15 Selahattin Sulhi Tekinay, Tekinay Borçlar Genel Hükümler, 7th Edition, İstanbul 1993, p. 341.
16 Candoğan, Şirket Birleşme ve Devralmalarında Ortaya Çıkabilecek Uyuşmazlıklar, (Date of Access: 04.06.2022) https://www.mondaq.com/ turkey/shareholders/1176580/350irket-birle351me-ve-devralmalarda-ortaya-305kabilecek-uyu351mazl305klar-.
17 Esin, p. 477.
