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The Demerger of Stock Companies Under The Turkish Commercial Code

TARIK SAHIN
Demerger of Stock Companies Under Turkey Commercial Code

Stock Company Demergers Under The Turkish Commercial Code

A demerger is a kind of corporate reorganization in which a company’s business activities are divided into one or more components. The polar opposite of a merger or acquisition. This article will discuss the demerger of stock companies under the Turkish Commercial Code.

1. Demerger of Stock Companies: The Concept of Demerger of a Company in General

Once established pursuant to the Turkish Commercial Code (“TCC“), stock companies, at their discretion, might undergo structural changes to enhance their competitiveness and strengthen their financial status. In this regard, as one of the alternatives, companies might opt for demerger by virtue of separating their assets and liabilities partially or in full. The pertinent articles regulating the demerger process under Turkish Law are TCC Articles 159 to 179.

According to TCC, there are two possible ways of demerger, which are;

I) Full demerger by which the company is split off into components for restructuring purposes and all the assets are sold, as a result of which the company no longer maintains its legal entity and is treated as if being liquidated and,

II) A partial demerger whereby demerging company retains equity at the new company, which will purchase some assets of the demerging company. This process is quite similar to the spin-off. The main difference is that the demerging company no longer exists in the full demerger, also widely known as split-up. All the records for the company are removed from the Trade Registry. In contrast, in the spin-off, the company is subject to the demerger, carrying out its activity and operating independently.

The demerger process can be completed by transferring assets to an already existing company or to a newly established company incorporated to buy out assets of the demerging company. This distinction is important, especially for ensuing transactions and paperwork required to consummate all the processes for demerging.

2. What Are The Transactions Required For The Completion of Demerger?

I. Capital Increase and/or Decrease: TCC Article 162 heavily regulates the concept of capital reduction during the implementation of a demerger. In partial demerger, the capital reduction is required to align the outlook of demerging company from a financial point of view after capital loss due to transferring certain parts of its assets to a third-party company.

However, it is not regulated under TCC. The proportion and conditions of capital shall be reduced based on the demerger. Still, the capital shall be reduced at least to the level to avoid technical bankruptcy in any event.

In case of split-up or full demerger, the capital reduction will not be an issue in the sense that the demerging company shall cease to exist and be removed from the Trade Registry.

The requirement of a capital increase due to demerger is regulated under Article 163 of the TCC. Accordingly, the transferee company assets in the demerger process are obliged to increase its capital to a certain level to ensure the rights of the shareholders of the demerging parent company remains intact and unaffected.

The capital increase must be conducted by registration and announcement at the Turkish Trade Registry, based on a resolution adopted at the General Assembly of the Company, in accordance with the same procedure stipulated and applicable for amendment in Articles of Association.

Suppose demerger takes place through the incorporation of a newly established company. In that case, the company’s charter capital shall be equal to assets transferred by the demerging parent company.

As a caveat, although the general incorporation rules for the companies must be strictly complied with, the limitation set out for the contribution of in-kind capital does not apply to the demerger process.

Here is an article for further reading that might interest you: Capital Increase at Joint Stock Companies Under Turkish Law.

II. Demerger Agreement and Demerger Plan: Per TCC, if a parent company transfers certain parts of its assets to existing companies through a demerger, a Demerger Agreement shall be executed by and between boards of the participating companies to demerger process. On the other hand, if a parent company plans to transfer parts of its assets to a new company, then a Demerger Plan shall be drafted, including draft Articles of Association of the new company to be incorporated.

III. Demerger Report: It is prepared to provide information to the shareholders about the demerger process to ensure shareholders make informed decisions about the transaction. Participating companies might draft a joint report for their respective shareholders.

It is imperative to touch upon and explain the ramifications of the demerger process on the receivables of the participating companies; to elaborate on whether the due amount left at the disposal of demerging parent company after asset transfer shall be sufficient meet the debt owed to creditors.

IV. Right to Inspect: Each company participating in the demerger process is obliged to submit the following documents to the review of their respective shareholders no later than two months before the General Assembly Meeting to be convened to adopt the demerger process:

  • Demerger Agreement and Demerger Plan,
  • Demerger Report,
  • Financial statements and annual reports covering the preceding three years and interim balance sheets.

If all shareholders unanimously approved at the general assembly meeting, small-sized companies within the meaning of the law can dispense with the necessity of the right to inspect. Each of the companies participating in the demerger process is obliged to announce the right to inspect the Turkish Trade Registry Gazette and its web pages.

V. Securing Creditor’s Rights: The Law requires certain procedures to be implemented to avoid any harm incurred by creditors due to the demerger. Accordingly, participating companies in the demerge process shall invite their creditors to notify their receivables and make a security claim through an announcement at the Turkish Trade Registry Gazette, three times at seven days intervals.

VI. The Status of Assets Excluded From Demerger: It is possible to make arrangements at the demerger agreement and demerger plan concerning assets to be excluded from demerger and hence remain under the disposal of the parent demerging company. If failure to touch upon that issue in the said documents, then the provisions of the TCC shall apply.

VII. Responsibility of The Companies Participating in Demerger: According to Article 176 of the TCC, parties involved in the demerger process shall be jointly liable for the debts owed to the creditors in case the party expected to incur the debt and make the payment according to demerger plan fails to honour its obligation in due course and becomes a party in default. As a side note, personal liability of the shareholders of the parent demerging company for the debt shall drop due to statute of limitation after three years, starting from the announcement at the trade gazette of demerger decision.

VIII. Protection of Employee: In demerger, unless objected by the employee, the labour contracts shall be transferred to the transferee company with all rights and debts arising thereby up until the transfer day. If the employee objects, the labour contract is terminated at the end of the grace period stipulated in the Turkish Labor Code; the transferee and the employee are liable to fulfil their obligations until the termination date. In this context, the former employer and transferee will be severally liable for the employees’ receivables which are already due before the demerger, as well as further rights to be conferred up until the end of the employment agreement in case the employee objects to the assignment of its labour contract to the transferee company.

Related Article: Conversion of Limited Liability Company into Joint Stock Company Under Turkish Commercial Code.

3. Resolution on Demerger and Registration at The Trade Registry

After securing the debts owed to the creditors, the managing bodies of participating companies to the merger process are expected to submit the Demerger Agreement and Plan to the General Assembly of the Shareholders of the Company. Approval vote of the qualified majority of the shareholders is required to adopt a resolution for demerger unless a specific majority for a quorum is present and a decision-making process is sought at Articles of Association of the participating companies.

When the demerger is approved at the general assembly of the shareholders, the company’s board of directors shall have the resolution registered at the Trade Registry of Turkey. Suppose the capital of the demerging parent company shall be reduced due to partial demerger or spin-off. In that case, the amendment to the Articles of Association in this regard shall be brought and registered as well.

In case of full demerger or split-up, the emerging parent company shall automatically cease to exist upon registration of demerger resolution at the trade registry. All the actives and passives at the balance sheet shall be assigned to the transferee company upon such registration without any further notice or transaction.


Article Keywords: Demerger of Stock Companies, Turkey Commercial Code, Stock Companies, Demerger, Concept of Demerger, Demerger of a Company, The Demerger of Stock Companies Under The Turkish Commercial Code, Demerger of Stock Companies Under Turkish Commercial Code.

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