New law regulates bank consolidation

Author: | Published: 1 Apr 2007
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In line with the amendments to the Banking Law 5411, which came into force on November 19 2005, the Banking Regulatory and Supervision Authority (the "BRSA") published regulations to enact its ancillary legislation at the end of 2006. One of these regulations is the Regulation on Banks' Merger, Acquisition, Spin-off and Share Exchange. This Regulation is mainly based on, and aims to elaborate, Article 19 of the Banking Law on M&A, spin-off and share valuations.

Mergers, transfers, spin-off and share exchange transactions are subject to the BRSA's approval. Applicant parties must submit their detailed feasibility reports, incorporating their expectations of the transactions and a pro forma balance sheet including targets for the three years after the transaction date. The BRSA may request further documentation. The approval of the BRSA becomes null and void if concerned parties subject to the transactions cannot hold their general assemblies in line with the procedure and principles set out by the Regulation.

Mergers

The Regulation defines mergers as: "The transfer of all liabilities and responsibilities of a bank to one or more than one bank or financial institutions along with all its rights and receivables and deposit or participation funds by way of the merger banks' dissolution."

Merging banks must convene their general assemblies and approve the merger balance sheet (prepared by an independent audit company appointed by the banks' boards of directors) and the draft merger agreement. If the merger balance sheet and the draft merger agreement have been permitted by the merging banks' general assemblies, the boards of directors should also be authorized to prepare and sign the new bank's articles of association and the merger agreement. The Regulation stipulates that the merger agreement should include: (i) the terms and prescribed stages of the merger; (ii) the dissolving bank's and newly established bank's title and headquarters; (iii) a provision indicating that the draft articles of association of the new bank are being prepared and executed; (iv) a provision indicating that the new bank's share capital amount will be met by merging banks' or financial institutions' assets (if this founding share capital does not reach the ratio of TNL30 million ($21 million), the difference must be met by a capital increase to be made within three months from the registration of the new bank with the trade registry; (v) a provision stating that all active and passive rights and liabilities of merging banks will be transferred to the new bank; (vi) information on share amount and type to be given to merging banks' or financial institutions' shareholders, exchange ratio of shares, nominal values and numbers of pre-emptive shares, if any; and (vii) a phrase indicating that the merger will be realized free of collusion, otherwise the merging parties will be jointly and severally liable for possible damages.

The duly prepared draft merger agreement, which has been signed by each of the parties' board of directors, will be submitted to the BRSA along with other merger documentation. While reviewing the application, the BRSA will analyse the banks' position and their compatibility with the Banking Law, related legislation, standard ratios, credit restrictions, organizational structure, branch structure, internal control, risk management and internal audit systems. The BRSA is vested with the right to request merging banks to take further measures to ensure they benefit from the merger and strengthen their financial status.

After the BRSA's approval, the merging banks will convene their general assemblies and approve the merger agreement, and the new bank's articles of association, balance sheet and profit loss tables. The general assembly resolutions and new bank's articles of association must be sent to the BRSA within seven days as of the general assembly date. The BRSA's approval on registration of the general assembly resolutions will be published in the Official Gazette. The new bank's establishment will be officially realized after the general assemblies on the merger and articles of association are registered with the related trade registries within seven days after publishing of the BRSA's approval.

Spin-off

Spin-off is a new definition incorporated into the Banking Law and its secondary legislation. Spin-off can be realized in two ways: (i) with the full spin-off method, the bank can be transferred to another bank, financial institution or joint stock company by setting apart all its assets, provided that the subject bank is dissolved; and (ii) under the partial spin-off procedure, one part or more of the bank's assets can be transferred to another bank, financial institution or other joint stock company, and the bank subject to the spin-off would not be dissolved.

Banks, financial institutions and joint stock companies subject to the spin-off must follow the same procedures as merging banks, while holding their general assemblies before and after the spin-off agreements, drafting the spin-off agreement and registration with the trade registries. The Regulation has clearly affirmed that general assembly resolutions on the spin-off and amendments to the articles of association of the surviving corporation may be registered with the related trade registries without seeking the prior approval of the Ministry of Trade and Commerce or related provincial general directorates. The banks or the financial institutions or other joint venture companies will take over the active and passive rights and liabilities of the transferring corporations that are subject to the spin-off after the respective general assembly resolution on the spin-off is registered. In cases of full spin-off, the party subject to the spin-off will be dissolved.

Exchange of shares

When a bank takes over a bank or financial institution's shares by taking control of the banks or financial institutions and gives its shares to the transferring bank or financial institution in return for the transaction, this is structured as an exchange of shares.

The bank exchanging its shares must follow the same procedures as merging banks, while holding its general assemblies before and after the share exchange agreement, drafting the share exchange agreement, and registration with the trade registries. In the share exchange agreement, the following points should be included: (i) the terms of the share exchange and its prescribed stages; (ii) the title and headquarters of the bank and financial institution that are parties to the share exchange; (iii) that the capital increase in the bank exchanging its shares will be conducted in proportion to the shares to be given to the bank that transfers its shares; and (iv) information on share amount and type to be given to shareholders of the bank or financial institution whose shares are being transferred, exchange ratio of shares, nominal values and numbers of pre-emptive shares, if any; and a phrase indicating that the share exchange will be realized free of collusion and otherwise parties will be jointly and severally liable for possible damages.

Transfer of a bank

Under the Regulation, transfer means the transfer of the bank, along with all rights and liabilities, by the transferring bank's dissolution. The transfer can be carried out when the bank takes over a bank or more than one bank.

Banks subject to the transfer transaction also follow the same procedures as merging banks, while holding their general assemblies before and after the transfer agreement, drafting the transfer agreement and registration with the trade registries.

In the miscellaneous section of the Regulation, it has been indicated that, when at least one of the banks subject to merger, spin-off, transfer and share exchange are public companies, the related agreements shall be subject to the capital markets regulations. Banks and/or financial institutions to be merged, to be subject to spin-off, to be transferred or exchanged are not required to pay all debts or secure them as a condition for finalizing the transactions. These debts or receivables will not become due and payable due to the merger, spin-off, transfer and share exchange transactions. If the thresholds stipulated under Article 18 of the Banking Law (10%, 20%, 33% or 50%) are exceeded as a result of the related transactions under the Regulation, a separate approval should be obtained from the BRSA. Transfer of bonus shares or shares vested with the right to appoint members for the management and audit boards also needs the approval of the BRSA and transferee shareholders are required to produce documentation evidencing that they bear the qualifications sought for founder shareholders (such as not being bankrupt, having solid financial capacity, not being sentenced to penalties and convicted of listed crimes). The Regulation provides that resolutions to be adopted in the general assemblies held to approve pro forma balance sheets and draft merger, spin-off, transfer and share exchange agreements must also be approved by the general assembly of the minority shareholders, should the resolution have affect on them.

Mergers and acquisitions are on the rise in the Turkish banking sector, due to various local and international motives, thus adoption of the supportive legislation of the Banking Law is vital. The introduction and elaboration of new definitions and alignment of procedures to be followed during these restructuring mechanisms is also, without doubt, a welcome contribution to the banking sector.

Author biographies

Ebru Demirhan

Taboglu Ates & Demirhan

Ebru Demirhan graduated from Ankara University, School of Law in 1994 and received her LLM degree from Exeter University in 1997. She was admitted to the Istanbul Bar Association in 1996. She is also a member of the Istanbul Bar Association and International Bar Association.

Zeynep Lale

Taboglu Ates & Demirhan

Zeynep Lale graduated from Marmara University, Schoolof Law in 2001 and was admitted to the Istanbul Bar Association in 2002. She is also a member of the Istanbul Bar Association and International Law Students Association.