New Lawsuits Regarding Mergers, Spin-Offs And Conversions
Introduction
The Turkish Commercial Code No. 6102[1] (“TCC”) introduces detailed provisions regarding merger transactions, regulates for the first time spin-off transactions and materially broadens the scope of conversion of type transactions. Both Swiss legislation and the acquis communautaire were taken into consideration in the drafting of these provisions.
The TCC introduces new concepts such as squeeze-out and sell-out rights, a consideration to be paid to the shareholder, and regulates new shareholder rights. The system of protection of creditors is amended and the old mechanism which prevented the realization of restructuring transactions is abandoned. A simplified procedure is envisaged based on the scale of the companies involved in the transaction. Thereby, the TCC addresses restructuring transactions in detail. Statutory provisions aim at facilitating these transactions.
Restructuring transactions may cause conflicts of interest between various stakeholders. For this reason, the TCC regulates new types of lawsuits in its aim to strike a balance between various interests while establishing the framework for restructuring transactions. The first lawsuit is in relation to preserving the continuity of the shares and rights of a shareholder. The second lawsuit is regarding the annulment of restructuring decisions. The third lawsuit is a special liability lawsuit for damages caused (due to negligence or fault) by persons participating in the restructuring transactions.
Lawsuit Examining the Company Shares and Rights
In General
The TCC accepts the principle of continuity of a shareholder’s shares and rights in merger, spin-off and conversion transactions. Articles 140, 161 and 183 TCC regulate the main principles in relation to preserving shareholders’ rights depending on the specificities of each transaction. In principle, a shareholder’s existing rights should remain in place, and should be adapted to the new merged, spun-off or converted company.
The lawsuit regulated under Art. 191 TCC serves to assess whether shareholders’ rights are duly preserved, and the provisions of the TCC on preserving shares and rights are duly applied.
Parties to the Lawsuit, Subject Matter and Jurisdiction
Any shareholder who alleges a violation of their rights may initiate a lawsuit to examine their shares and rights. The code did not restrict the right to file this type of lawsuit to the shareholders of the acquired or spun-off company. It is argued that the shareholders of the acquired, spun-off or acquiring companies may all initiate this lawsuit. With this lawsuit, the claimant may allege that their rights to continue shareholding are violated, that their shares or rights in the company were not duly preserved or that the consideration paid was not adequate.
The defendant to the lawsuit will depend on the restructuring transaction. In a merger transaction, the acquiring or the newly established company shall be the defendant to such a lawsuit. In the event of a partial spin-off, a shareholder may file the lawsuit against the company that has acquired the assets allocated to said shareholder, and in the event of a full spin-off to one or all companies. The converted company will be the defendant in the event of conversion.
Art. 191 TCC regulates that the claimant may request an equalization (offset) payment. Nevertheless this is different from the offset payment made under Art. 141/2 TCC to shareholders in a merger transaction. An offset payment may be made to a shareholder, provided that it does not exceed 10% of the actual value of its shares, in order to avoid fractions while determining the exchange rate of the merger transaction. The offset payment to be made under Art. 191 TCC on the other hand is a payment made on the grounds that the shares, rights or consideration given to the shareholder are not adequate.
The authorized jurisdiction for this lawsuit is the commercial court of first instance where the headquarters of one of the companies engaging in the restructuring transaction is located.
Prescription Period
The lawsuit should be initiated within two months following the publication of the relevant merger, spin-off or conversion decision in the Turkish Trade Registry Gazette (“TTRG”).
It is regulated under the TCC that the merger and conversion decisions will be published on the TTRG (Art. 154 and 198/2 TCC), but the provisions governing the spin-off transaction only foresee a registration, and not a publication. Even though it is not explicitly regulated in the provisions governing spin-offs, pursuant to Art. 35/3 TCC, unless regulated otherwise, all matters which shall be registered are subject to publication; and accordingly it should be accepted that the spin-off decision will also be published in the TTRG.
Court Expenses
The TCC provides that the court expenses arising under such lawsuits shall be borne by the defendant company. The legislator has accepted the principle that a shareholder, whose rights have potentially been violated, should not bear the financial burden of the lawsuit.
The TCC also provides that under special circumstances that justify such a distribution, the claimant may be forced to partially or fully pay the court expenses. In the event it is apparent that shareholders have maliciously initiated a lawsuit or the lawsuit is denied, it is possible to charge the court expenses to the claimant shareholder.
The Effects of the Ruling
The ruling to be adopted at the end of the proceedings shall bear effect on all shareholders who are in the same situation with the claimant. Nevertheless the code gives no explanation on how this ruling may be enforced regarding other shareholders, whether it is necessary to give notice of the lawsuit to other shareholders, and how separate lawsuits filed by different shareholders who are in the same situation will be heard.
Art. 191/4 TCC regulates that this lawsuit shall not affect the validity of the relevant merger, spin-off or conversion transaction. Nonetheless, it is argued by scholars that this lawsuit should be filed together with the annulment lawsuit. Pursuant to this opinion, Art. 191 TCC introduces an innovative lawsuit. In order for this lawsuit to give rise to its innovative effects, it should be filed together with an annulment lawsuit. Nonetheless, the decision in favor of merging, spinning-off or conversion need not be annulled for there to be a ruling for an offset payment under this lawsuit. In fact, in the event the relevant decision is annulled, as the annulment will retroactively apply, there will no longer be a violation of a right or consideration which needs to be offset. Therefore, I do not agree with this opinion.
I am of the opinion that the claimant shareholder is not obliged to cast a negative vote against the merger, spin-off or conversion decision, nor ensure that his opposition is recorded.
Annulment Lawsuit
In General
The annulment of joint stock companies’ general assembly resolutions are regulated under Art. 445 et seq. TCC. These articles foresee three grounds for annulment: the contravention of law, articles of association and the good faith principle. Similar provisions may be found in Art. 622 for limited liability companies and Art. 53 of the Cooperatives Act for cooperative companies.
Nonetheless, Art. 192 TCC specifically regulates the annulment lawsuit when filed against restructuring transactions. Thereby, the contravention of provisions applicable to the restructuring process is subject to a separate and special annulment regime. Moreover, this special provision provides a legal remedy to collective and commandite companies in the event of transactions which contravene the law. Furthermore, restructuring decisions do not always require a general assembly resolution, as is the case with a facilitated merger whereby the decision can be taken by the managing body and not the general assembly, and a special provision is therefore necessary in order for such decisions to be annulled in the event of contravention of the law.
The annulment lawsuit filed based on the contravention of provisions regulating restructuring transactions is regulated under a specific provision. It is disputed whether, regardless of this provision, annulment lawsuits may be filed based on general provisions in the event of contravention of Art. 134 to 190 TCC.
Parties to the Lawsuit and the Subject Matter
Art. 192 TCC regulates the annulment of the merger, spin-off or conversion decision.
The shareholder of a company engaging in the restructuring transaction, who did not vote in favor of the decision for which it seeks the annulment, and who recorded their objection in the minutes may file this lawsuit. Nevertheless, in the event the managing body adopts the restructuring decision, and not the general assembly, this prerequisite does not need to be met. Contrary to the general annulment lawsuit, shareholders that did not participate in the meeting, the board of directors and board members are not authorized to file a lawsuit based on these provisions.
The lawsuit must be filed against the company whose decision is to be annulled. In the event that said company is dissolved and deleted from the trade registry, as in the case of a complete spin-off or a merger, the lawsuit will be initiated against the acquiring company.
Prescription Period
The annulment lawsuit should be filed within two months of the publication of the relevant decision in the TTRG, as is the case for lawsuits regarding the protection of shares and rights of shareholders. Nevertheless, the prescription period for the general annulment lawsuit is three months, which therefore results in a lack of coherence between the two provisions.
Even though Art. 192 TCC states that if the announcement is not required the prescription period shall commence as of the registration, I am of the opinion that this provision is not necessary. The TCC explicitly states that merger and conversion decisions will be announced in the TTRG. As I stated above in relation to the lawsuit regarding the protection of shares and rights of shareholders, even though the provisions governing spin-offs do not have such an explicit requirement, the spin-off decision should also be announced, and therefore it should be accepted that the two-year period commences as of the announcement. Nonetheless, there are dissenting opinions on this issue among scholars.
A facilitated merger does not require a general assembly resolution, as the decision may be adopted by the managing body. However even in this case, pursuant to Art. 126/3, the decision of the managing body must also be registered and announced. Thus, the prescription period should commence as of the announcement.
The Effects of the Ruling
In the event the courts decide that the relevant merger, spin-off or conversion decision should be annulled, this decision will retroactively apply. Therefore, all consequences of the restructuring transaction will be removed as if the transaction were not realized at all. Given both the dissolution of companies and the continuation of the activities of the merged, spun-off or converted company for the duration of the lawsuit, it is apparent that the annulment will result in severe consequences. Therefore, the TCC sustains the principle of preserving the validity of the merger, spin-off and conversion transaction.
Pursuant to the TCC, if the contravention which forms the basis of the annulment claim is due to a deficiency in the restructuring transaction, the judge shall grant a cure period for the deficiency to be overcome. In the event the deficiency is not or cannot be overcome in this time period, then the judge may decide to annul the relevant decision. It is also stated in the code that the courts shall adapt the necessary precautions. These precautions shall serve to overcome the problems which may be caused by the retroactive effect of the annulment decision.
Liability Lawsuit
In General
Art. 193 TCC specifically regulates the liability arising from not executing restructuring transactions in accordance with the law. Pursuant to this provision, persons participating in the restructuring transaction in any way shall be liable to the companies, shareholders and creditors of the companies involved for the damages they cause due to negligence or fault.
Parties to the Lawsuit
Contrary to the first two lawsuits I assessed above in relation to restructuring transactions, not only the shareholders, but also the company itself or its creditors may initiate a liability lawsuit.
The defendants to this lawsuit are defined with a broad scope in the TCC. Accordingly, persons who participated in the merger, spin-off or conversion transactions in any manner may be the defendants to this lawsuit. In the event of a broad interpretation of this provision, in addition to the company managers who engaged in the transaction, all auditors, financial institutions as well as other consultants who engaged in the transaction may become defendants. Nevertheless, pursuant to the strict interpretation, which should prevail, the responsibility of the bodies should be enforced rather than the responsibility of the persons who provide consultation services under an agreement executed with the company. Accordingly, the board of directors, managers, liquidation officers and directors may be held liable and become the defendants to this lawsuit. I am of the opinion that shareholders who participated in the general assembly meeting should also be kept out of the scope of this lawsuit.
Subject Matter of the Lawsuit
The claimants may request compensation for direct damages caused (due to negligence or fault) by the persons who participated in the transaction. Nevertheless, the indirect damages suffered by shareholders are subject to the general liability regime. The company may file a liability lawsuit based on Art. 193 TCC and be the claimant for its own damages incurred as a result of the restructuring transaction. However, in the event the company incurs damages, the shareholder may file a lawsuit based on Art. 555 TCC for its indirect damages, and request compensation to be paid to the company. In such a case, in the event the court expenses and proxy fees are not charged to the defendant, they will be distributed between the claimant and the company (Art. 555/2).
Art. 193 TCC does not eliminate the general liability regime. Art. 553 and 664 regarding the liability of founders, and provisions such as Art. 549 regarding liability arising from untrue documents or statements shall continue to apply. The liabilities related to abuse of control, regulated among the provisions governing group companies (Art. 202/2 TCC) are also preserved.
Conclusion
The TCC regulates new lawsuits aiming to protect the conflicting interests of various parties affected by merger, spin-off and conversion transactions.
The enacted provisions show that the TCC favors the realization of restructuring transactions. Nonetheless, damaged parties are protected through the right to file lawsuits. Accordingly, a balance is sought between the realization of the restructuring transaction and the protection of the stakeholders.
[1] Official Gazette, 14 February 2011, No. 27846.
All rights of this article are reserved. This article may not be used, reproduced, copied, published, distributed, or otherwise disseminated without quotation or Erdem & Erdem Law Firm's written consent. Any content created without citing the resource or Erdem & Erdem Law Firm’s written consent is regularly tracked, and legal action will be taken in case of violation.
Other Contents
The Turkish automobile and light commercial vehicle market left the 2000s behind with steadily rising sales figures and the 2010s with high and stable sales figures as well. In this period, the growth of the market was driven not only by high purchase power but also by easy access to credit and product diversity...
Turkish Commercial Code No. 6102 ("TCC") provides the right to exit from the company to the shareholders of limited liability companies and the right to squeeze out the shareholder from the company, unlike the structure of joint stock companies, with the exit and squeeze out institutions specially regulated for...
Turkish Commercial Code No. 6102 (“TCC”) preserves the rule that the board of directors shall manage and represent joint stock companies. The TCC regulates how the power of representation shall be exercised, the registration and announcement of the persons authorized to represent, the transfer of the...
Ordinary partnerships are regulated under Turkish Law between Articles 620 and 645 of the Turkish Code of Obligations No. 6098 (“TCO” or the “Code”). The Law defines an ordinary partnership contract as a contract where two or more persons undertake to combine their labour or property to achieve a common...
Merger and acquisition processes are one of the legal processes that most seriously affect the identities and legal status of companies. After the completion of legal, tax, financial and operational due diligence reports, the parties initiate the negotiation process in case they reach an agreement on proceeding with the...
A popular business model for expanding market reach and brand recognition worldwide is franchising. Despite being less common than distribution agreements in the form of mono-brand store agreements, franchising is another significant method for extending luxury brands' distribution networks. Luxury brands use...
In the decision dated 14.06.2022 and numbered 2019/149 E. 2022/894 K., the Court of Cassation General Assembly (“CCGA”) evaluated the theory of piercing the corporate veil in the context of the relationship between the guarantor and the borrowing company in a dispute arising from a loan agreement...
The European Union continues to be an important investment center for foreign investors. According to data from the European Commission's "Second Annual Report on the monitoring of foreign direct investment in the European Union", the European Union received €117 billion worth of foreign direct investment in...
Transfer of shares is arguably the first legal transaction that comes to mind among the legal transactions regarding the shares of a capital company, and the most common transaction in practice. However, the shares of a capital company may also be subject to various transactions, other than share purchase...
Law No. 6563 on the Regulation of Electronic Commerce (E-commerce Law or Law) has recently undergone a radical change in order to regulate the behavior of the players in the rapidly growing and developing e-commerce sector. The new regulations that came into force as of January 1, 2023 envisage important...
On 11 June 2021, the German Federal Parliament approved the German Supply Chain Due Diligence Act (Lieferkettensorgfaltsgesetz) (“Act”) which affects not only German entities but also their suppliers in foreign countries (including Turkish entities). The main focus of the Act, which entered into force on...
On 21 December 2007, the Federal Council approved the draft revision of the Swiss Code of Obligations, which also includes amendments to company law. On 28 November 2014, the Federal Council referred the draft revision for consultation. Following extensive discussions and a long enactment process, the...
The Turkish Commercial Code No. 6102 ("TCC") regulates maritime trade contracts under the fourth part of the fifth book of the Code. Among the types of contracts regulated in this section, the most frequently used contract in international maritime transport practice is the freight contract regulated under...
Prohibition on hidden income shifting is one of the most important issues that is broadly regulated under Capital Markets Law No. 6362 (“CML”). In conjunction with CML Article 21, which has a broader context than Article 15 of the abrogated Capital Markets Law No. 2499, another significant step has been taken...
As a result of developing commercial activities and large-scale investments, especially concluded in the fields of construction, energy and mining, companies are seeking to participate in these investments by uniting their powers and expertise to take advantage of financial opportunities together. This tendency...
The Turkish Commercial Code (“TCC” or “Law”) has enabled companies to apply different structural models and to implement new legal formations by including spin-off provisions to its Article 159 et seq. In accordance with the provisions of the law, companies may transfer a certain element, or elements, of their...
The International Federation of Consulting Engineers is a professional association established in 1913, known as the FIDIC (Fédération Internationale Des Ingénieurs-Counseils). Its members are duly elected from consultant-engineer associations of various countries, and membership to the association is...
Incoterms are a set of rules introduced by the International Chamber of Commerce (ICC) to explain the commercial terms that are widely used in international trade. The purpose of Incoterms rules is to facilitate and expedite international trade in a safe and secure manner...
The regulation applicable to all Turkish ports prepared by the Ministry of Transport, Maritime Affairs and Communications that entered into force after being published in the official gazette on October 31, 2012 (˝the Regulation˝), consolidates all the bylaws, regulations and instructions in a single Regulation...
As a rule, rights and obligations arising from an agreement have legal consequences only between the creditor and the debtor which are parties to the agreement. This principle is referred to as "privity of contract." In general, contracts for the benefit of third parties, where the fulfillment of an...
The rules of e-commerce, which grow and develop with the digitalizing world, are changing. E-commerce has become the driving force of the digital economy. However, considering the growth rate of e-commerce and the transformation it has undergone in a short time, it is obvious that some...
The dissolution of a company is a specific type of dissolution, which results in the cancellation of the legal personality which was gained by registration at incorporation. The specific proceeding which leads to the dissolution, and thus, the termination of a company upon the constitutive decision...
Companies in which shares or authority to manage is held by members of a family are considered to be “family businesses”. Family members can hold shares that control the company, as well as retain management authority. Having a family business means opportunity, security and income for...
Turkey ratified the Convention on the Contract for International Carriage of Goods by Road (“CMR”) in accordance with Act No. 3939 dated 7 December 1993, and the CMR entered into force in Turkey on 31 October 1995. In accordance with Article 1 / 1 of the CMR, the carriage of goods by road...
Ordinary partnerships are governed by Article 620 et seq. of the Turkish Code of Obligations No. 6098 (“TCO”). An ordinary partnership agreement is defined as an agreement whereby two or more persons undertake to join efforts and/or goods to reach a common goal...
The concept of disguised profit transfer in joint stock companies, in its broadest meaning, covers the transfer of company assets to related parties and may occur in different ways. This concept is regulated in detail under capital markets legislation...
Share subscription agreements, which are commonly encountered in start-up investments, set out the terms and conditions of an investor’s participation in a company as a shareholder by subscribing the new shares issued in a capital increase...
The electronic signature, which has the same legal consequences as wet signatures if it meets certain conditions, has taken its place in many legal systems and has enhanced commercial life. Although there are various types and applications in different legal systems...
INCOTERMS are a set of rules introduced by the International Chamber of Commerce (ICC) to explain the commercial terms that are widely used in international trade. The purpose of the Incoterms rules is to contribute to and facilitate the safe and swift conduct of international trade...