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MERGERS & ACQUISITIONS
Mergers and acquisitions (M&A), with all its dimensions in legal, finance, and tax systems, refer to one of the most popular fields all over the world. Mergers and acquisitions, although used interchangeably, have different meanings. Legally, an acquisition can be directly or indirectly conducted through a partial or whole takeover by a company of another company or companies. In Turkey, however, a merger can take place either in the form of an acquisition (takeover) or a new incorporation.
In the latter case, a merger would combine companies under a single company name that later forms a new legal entity, which is also known in practice as a merger with tax. Assets are liquidated and combined under a new balance sheet to be taxed according to the relevant liquidation provisions. This type of merger takes place within a newly established company.
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If the merger were conducted in the form of a takeover, however, this would be deemed to be a merger without tax. This type of merger is also known as financial consolidation since the assets of the transferred company would not be liquidated but transferred to the acquiring company based on their value determined in the balance sheet.
Inevitably, in a merger or acquisition transaction, steps leading to the closing of a transaction are conflicting, one of which constitutes the valuation of the target company or companies subject to the relevant transaction. If there is no specific rule governing the valuation, often small-midsized companies are valued over a trial balance sheet that can be drawn up from their financial statements. However, if the valuation is critical or mandatory, a valuation report should be prepared by authorized experts.
Mergers and acquisitions can be divided depending on several variants, such as by their types or formats. With each passing day, companies attach immense importance to merger and acquisition processes to achieve their commercial goals.
Without a doubt, corporate mergers and acquisitions have become essential elements in business life and the economy.
What Are The Most Common Merger and Acquisition Types under the Turkish Legislation?
The following are some common transactions that fall under the umbrella of mergers and acquisitions in Turkish practice:
- Mergers in the form of acquisition (takeover or merger with tax),
- Mergers in the form of new incorporation (merger without tax),
- Acquisitions of shares (share deal),
- Acquisition of assets (asset deal),
- Tender Offers (IPO),
- Management takeovers.
How Are Merger and Acquisition Types Structured Under Turkish Legislation?
Merger in The Form of an Acquisition
In a merger in the form of an acquisition, one or several parties become terminated while transferring the properties consisting of their assets and liabilities to the other parties forming the other side of the transaction. Thus, the shareholders of the terminated company become shareholders of the transferee (acquirer) company.
Acquisitions among parent-mother companies and their subsidiaries or parent-mother companies and their sister companies may occur through this type of merger.
Merger in the Form of New Incorporation
In a merger in the form of a new incorporation, two or more companies transfer their properties consisting of items in their assets and liabilities to a newly established company (NewCo) and subscribe them to that company as share capital. In consideration of the properties transferred by the shareholders of the terminated companies, shares of the NewCo in return for an exchange rate shall be given. NewCo gets its legal entity after the registry of the merger agreement with the relevant trade registry. Companies participating in the merger in the form of new incorporation become terminated.
Acquisition of Shares (Share Deal)
In this type of acquisition, one or more of the transacting parties may acquire shares of the other party or parties’ shareholders according to a Share Purchase Agreement (SPA). The acquisition of shares is accomplished to the applicable provisions of the company’s charter and/or applicable provisions of the Turkish Commercial Code (TCC), whose shares are subject to transfer. The sale/purchase price can be determined as cash, stock (or combination thereof), or property.
If the acquirer buys the target entirely, the target becomes a subsidiary, and the acquirer/buyer becomes a mother/parent company. Thus, the acquirer indirectly owns the transferred company’s assets and liabilities. Usually, the target’s assets and liabilities will remain the same. If the transacting parties will run the company’s management together after the transfer, a shareholder’s agreement (SHA) is signed simultaneously.
Acquisition of Assets (Asset Deal)
An asset deal occurs both to Article 11/3 of the Turkish Commercial Code and Article 202 of the Turkish Code of Obligations (TCO). In an asset deal, the acquirer buys some or all of the target company’s assets under an “Asset Purchase Agreement“. Some or all the responsibilities regarding the assets acquired under the contract are also taken over, or it may be decided that no responsibility is taken.
This type of merger is generally preferred when it’s not worth becoming a shareholder of the target rather acquisition of assets is advantageous from judicial and/or tax liabilities related to share transfer, e.g., in a case where a company produces several products but only one product is purchased, an asset deal may be preferred.
Tender Offer (IPO)
Tender offers fall under the broad definition of mergers and acquisitions, which are contemplated according to a special regulation in force as part of the Turkish Capital Markets Law. In a tender offer, a company offers to buy the other company’s outstanding stock at a specified price rather than the market price. The acquiring company forwards the offer directly to the other company’s shareholders, bypassing management and the Board of Directors.
In management takeovers, also known as a management-led buyout, the directors of one company purchase a controlling stake in another company, making it private. These former executives often partner with a financier or former company officials to help fund a transaction. Such mergers and acquisitions are often disproportionately financed by debt and require the approval of a majority of shareholders.
Management takeovers are recognized per the Turkish Competition Law and defined as either by the exercise of the controlling company’s right to adopt strategic resolutions of the other company, which is generally gained by assigning majority right in that company, or by earning a veto right in adopting strategic resolutions but not becoming entitled to resolve thereupon solely (sole negative control). In the latter case, only a shareholder would be entitled to prevent adopting strategic resolutions. The sole control can be acquired legally or de facto.
Which Mergers Are Valid Under Turkish Legislation?
Mergers in the form of an acquisition or new incorporation may occur pursuant to Article 137 of the Turkish Commercial Code. Accordingly,
(1) Capital companies may merge with; a) Capital companies, b) Cooperatives, and c) Collective and commandite companies, if they are transferee companies.
(2) Private companies may merge with; a) Private companies, b) Capital companies if they are transferred companies, c) Cooperatives if they are transferred companies.
(3) Cooperatives may merge with; a) Cooperatives, b) Capital companies, and c) Private companies, provided that they are transferee companies.
The procedures and principles regarding merger transactions in which at least one of the parties is a publicly held corporation is regulated under a special Communiqué II-23-2 promulgated by the Turkish Capital Markets Board according to the Turkish Capital Markets Law dated 6 December 2012 and numbered 6362. The referred Communiqué covers merger transactions between publicly held corporations and private companies and cooperatives provided that the publicly held corporations are acquiring corporations.
On the other hand, share deals and asset deals occur between natural or legal persons acquiring shares or assets of other natural or legal persons being shareholders or owners of such shares or assets.
Mergers and Acquisitions Agreements
As it applies to other jurisdictions of the world, also in Turkey, negotiations of a merger and acquisition agreement start with the signing of a confidentiality agreement or non-disclosure agreement, which is followed by a letter of intent, term sheet, or memorandum of understanding, whatever the case may be.
The forms of such types of agreements are mostly alike to their origins emanating from US or UK laws, however, they adapted to the mandatory provisions of the Turkish legislation unless the parties have not determined the governance of a law other than the Turkish laws.
However, at the end of the day, since Turkish jurisdiction prevails over the actual closing of the transaction, mostly the Turkish Commercial Law and/or the Turkish Obligation Law will be applicable. Therefore, the choice of local laws then currently in force within the Turkish jurisdiction is always recommended.
For companies to merge in the form of an acquisition or in the form of a new incorporation as per the Turkish Commercial Code, a merger agreement is required to be drafted as per Article 145 of such code. The written form is a condition for the validity of the merger agreement.
The merger agreement is signed by the superior management corporate bodies of the companies participating in the merger and executed by the Board of Directors (BoD). The merger agreement is a typical format that includes all the plans and essential fundamental principles of the merger transaction. It only has an indebtedness effect.
Since the merger results in the participating companies in a structural change, more than that, it causes on the side of the transferred company a termination; the merger agreement must be adequately voted in the general assembly of companies and bound to a resolution. For this reason, the merger agreement is subject to a delayed condition. In other words, its validity will be pending until the approval of the general assembly resolution.
In share deals or asset deals, the form of agreement is subject to the mandatory provisions of the Turkish Commercial Code and the Turkish Code of Obligations. The rule for closing such transactions depends on the provisions in the relevant company’s charter stipulated for the related transfer, in the lack of which the applicable provisions of the referred laws prevail. The same applies to management takeovers.
Participation in The Merger in Case of Loss of Share Capital or Technical Bankruptcy
Although reviewing the financial tables of the target to initiate the merger and acquisition process is a must recognized all over the world, middle-sized companies may experience financial difficulties and would be in need of a leveraged buyout. Therefore, having a trial balance sheet and checking whether these kinds of companies have negative equity is always worth it.
A unique mechanism recognized by the Turkish Commercial Code for companies suffering from technical bankruptcy is stipulated under Article 139 to overcome these financial bottlenecks. Under the referred provision, a company that has lost half of its capital and legal reserves due to losses or is insolvent may merge with a company that has freely disposable equity in an amount sufficient to cover the lost capital or, if necessary, insolvency. The submission of documents to the competent trade registry directorate at the location of the headquarters of the company with negative equity evidencing that such condition has been fulfilled is essential.
The simplified merger is a special process designed by the Turkish Commercial Code granted to capital companies such as limited liability companies or joint stock companies established as per the same code. This type of merger is stipulated under Articles 155 and 156 of the referred code, which enables the transacting parties to close the merger in a shorter time and enjoy certain benefits granted to them.
This type of merger can be contemplated if the acquiring company owns all the shareholding interests in the acquired company or all the shareholding interests granting voting rights to the merging companies are owned by a company or group of natural persons.
Thanks to this process, parties to a simplified merger are released from putting up a merger report or the obligation to submit the company books for review and audit by the shareholders. Additionally, submitting the merger agreement for the approval of the general assembly of shareholders is not mandatory if the acquiring company owns at least ninety percent interest in the acquired company.
These types of mergers are preferred, especially if the transacting parties are subsidiaries or affiliates of the same group. In any case, minorities are protected in a simplified merger if one of the transacting parties owns a ninety percent interest in the other one, provided that the minorities must be sufficiently compensated in consideration of their shares in cash and no additional payment liability or personal liability would be emerging because of the merger.
Approval of Regulatory Bodies
Before starting with a potential investment in Turkey by virtue of a merger and acquisitions, prerequisites such as permission or authorization of regulatory Turkish institutions or agencies should be checked. As referred to above, if one of the transacting parties is a publicly held company, the merger would occur to a particular regulation issued by the Turkish Capital Markets Board to this end.
Similarly, the Banking Regulatory and Supervision Agency and the relevant banking legislation should be reviewed if one of the parties’ becoming a party to a merger or acquisition transaction would be subject to the permission of the referred agency.
In mergers and acquisitions with competition issues, i.e., mergers and acquisitions falling under the criteria set by the related Communiqué of the Turkish Competition Authority, such as thresholds over a certain amount within Turkey or worldwide, would require the permission of this authority.
The Energy Markets Regulatory Agency also stipulates that certain restructuring of companies operating under a license granted by that authority is either subject to permission or notification, in which case following certain rules to comply with would be mandatory for closing the transaction.
What Are The Reasons Underlying Merger and Acquisition Transactions?
Like in the rest of the world, mergers and acquisitions in Turkey can also happen for a variety of reasons, such as:
- Unlocking Synergies,
- Higher Growth,
- Stronger Market Power,
- Tax Advantages.
The common logic of mergers and acquisitions is to create a synergy where the combined company is more valuable than the two companies alone. This synergy may result from lower costs or higher revenues.
Cost synergies are created due to economies of scale, while revenue synergies are typically created by cross-selling, increased market share, or higher prices. Cost synergies from the two can be easily measured and calculated.
Inorganic growth through mergers and acquisitions is often a faster way for a company to generate higher revenues than organic growth. A company can profit by acquiring or merging with a company with the latest capabilities without taking the risk of developing it internally.
Stronger Market Power
In a horizontal merger, the emerging business will gain a higher market share and the power to influence prices. Vertical mergers also lead to higher market power as the company will have more control over the supply chain and thus avoid external shocks in supply.
Companies operating in cyclical industries need to diversify their cash flows to avoid significant losses during the slowdown in their industries. Achieving a target in a cyclical industry enables a company to diversify and/or mitigate market risk.
Tax benefits are examined where one company earns significant taxable income while the other suffers tax losses. The company’s acquisition with tax losses enables the acquirer to use the tax losses to reduce its tax liability. However, mergers aren’t usually done just for tax benefits.
What is The Role of MGC Legal in Mergers and Acquisitions in Turkey?
MGC Legal’s expert team of mergers and acquisitions, whose goal is to provide effective and perfect solutions in legal matters, assists its clients in the most appropriate legal and tax-optimized structuring and advises on the preparation, negotiation, and implementation of merger and acquisition agreements for parts of the business as a solution partner rather than an ordinary consultant. Mergers and acquisitions are among the most complex and important vents in an organization’s life, and their consequences reverberate internally and externally.
Most mergers and acquisitions are done in large and medium-sized companies. Large companies often focus on buying and selling publicly traded companies. These are often the largest and most complex deals, may involve cross-border jurisdictions, and may include cash or stock issues. M&A agreements between private companies can be multifaceted, especially when partnerships are involved.
MGC Legal gives its clients confidence, utmost importance, and attention and shows tremendous efforts to build a lawful, sound, and trustworthy relationship with its clients. Therefore, its members evaluate each transaction at hand meticulously to offer the best legal advice any client can have when entering the doors of MGC Legal.
MGC Legal defines the objectives of its clients primarily in mergers and acquisitions, spin-offs, split-offs, leveraged buyouts, downsizing, joint ventures, and restructuring. It identifies legal issues that vary depending on factors by applying its checks and balances relying on the unique experience of its members accumulated over the years, such as whether the agreement is amicable or not.
It creates an end-to-end roadmap for its clients and adds a time frame with specific milestones. By doing thorough due diligence, it gives the best advice on negotiation tactics, determining the most important issues, their effects on the transaction, and prerequisite requirements. With its deal-maker attitude, it works meticulously to minimize risks by applying a preventive approach and drawing a crystal-clear path from day one until closing.
What Are MGC Legal’s Mergers and Acquisitions Services in Turkey?
MGC Legal provides the following services that both national and international clients need during mergers and acquisitions:
- Representing its clients through every step of the transaction and participating in negotiations on behalf of its clients.
- Structuring before the transaction, such as divisions, separation of a certain part of the business line or company, taking on another corporate structure, sale, and liquidation of assets, if applicable.
- Collaboration with financial, tax, and technical consultants hired by its clients to deal with the transaction.
- Check and review of the financial tables from the legal and tax point of view to verify the eligibility of the parties to a merger and acquisition transaction.
- Conducting and supporting due diligence services from A to Z, including collecting information and documentation or preparation of the same on behalf of the client, either online or onsite.
- Advice on the most suitable legal and tax-optimized structures and strategies related to the transaction.
- Negotiation, review, revision, and conclusion of mergers and acquisitions agreements and all the relevant documentation, including confidentiality agreements, non-disclosure agreements, letters of intent, memorandum of understanding, term sheets, share transfer agreements, asset transfer agreements, shareholders agreements, share subscription agreements, etc.
- Preparation, follow-up, and submission of the necessary permissions, applications, authorization requests, or notifications related to mergers and acquisitions in private institutions, regulatory bodies or agencies, or public authorities, if applicable.
- Provides solutions for the most complex corporate governance issues.
- Preparation of each corporate governance documentation necessary for the closing of the transaction.
- Convention and assembly of corporate bodies for the closing of the transaction and preparation of all the necessary corporate documents.
- Re-organization or simplified merger after share transfer.
- Follow up every step of the transition period after closing until post-closing of the transaction and adaptation with applicable Turkish laws is complete.
- Integration services either on a retainer basis or case by case for an uninterrupted consultancy.