Turkey: A system promoting mergers
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Turkey: A system promoting mergers

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Erdem & Erdem Law Office

Professor Ercument Erdem and Özgür Kocabasoglu of Erdem & Erdem on M&A in the draft commercial code

The provisions of the current Turkish Commercial Code (TCC) concerning mergers and acquisitions do not help to guide their practice. They significantly restrict and even render impossible the merging of companies. However, the new Draft Commercial Code (Draft Code) prescribes the procedures for mergers and acquisitions in detail. One of the reasons for the adoption of such detailed provisions is the need and desire to achieve harmonization with the European Union legislation. Indeed the Draft Code is inspired by the Swiss Mergers Code which is based on European Union directives.

The Draft Code preserves the provisions of special codes concerning mergers and acquisitions. This is especially important for the special provisions and system prescribed for the mergers and acquisitions of banks. The special provisions of the Capital Market Code are also preserved.

The Draft Code introduces many new legal concepts, however, it does not introduce anything new with regards to the types of mergers. There are two types of mergers: merger through acquisition and merger through new establishment. The basic principles are as follows: a merger requires a termination without liquidation; however, the system of separate management of assets is waived. Termination and cancellation are simultaneous. The full succession system and transfer of shareholding continue with certain exclusions concerning usage shares and compensation payments.

Valid mergers

Where the Draft Code does differ from the TCC is that it permits the merging of different types of companies. It provides three main models showing how capital companies, personal companies and cooperatives will merge with other types as transferor and transferee. Whereas according to the TCC, the merging of liquidating or highly indebted companies or those losing their capital is forbidden, according to the Draft Code, in certain conditions the merger of such companies is possible.

There is one provision which is found in the Swiss Mergers Code but not found in the Draft Code; the merger of commercial companies with associations, foundations and personal establishments is not addressed. This is an intentional gap. The reasons for leaving such a gap are the small number of such mergers and the difficulty of such regulation in the Commercial Code system.

Protection of rights

Rights are protected by detailed provisions in the Draft Code. The main principle is that shareholding and other rights continue in the new company after the merger. In addition to the exclusions on compensation payment and usage shares, there is a new provision concerning equalization payments. The equalization payment may be explained as follows: as mergers will be based on a transfer rate, there will be remainders in the shares. For example, TL1.1 ($0.71), TL1.2. It is not easy to calculate and account for these remainders as shares. Therefore, certain payments are made instead of these remainders. This is called an equalization payment. This payment is not unlimited; it may not exceed 10%.


According to the TCC, shareholders have one vote against the merger while the companies decide on the merger. However, if the company decides on the merger, the shareholder is bound by this decision. This, in practice, usually results in the frustration of the merger due to various lawsuits initiated by the shareholders. The Draft Code, on the one hand, entitles the shareholder who is unhappy with the merger to exit and on the other hand, gives companies the opportunity to dismiss certain shareholders who continually cause problems, frustrate the works of the company and act contrary to the interests of the company. Thus the Draft Code accepts the exit and dismissal of a shareholder, which is completely foreign to the joint stock companies' nature. In other words, the principle that there is no exit and dismissal (except rejection) is changed for mergers. I think this is a very important innovation because it is possible to dismiss some shareholders elsewhere in the world. This is called a squeeze out in foreign laws. I find this new provision very positive for Turkey from a global perspective.

The right to exit and dismissal are to be provided in the merger agreement. The right to exit will be given to the shareholders by the merger agreement and dismissals are to be provided for in the merger agreement. A compensation payment will be made consisting of a certain amount of cash or other consideration. The reason for such payments may be explained as follows; if the shareholders participated in the merger, they would have certain shares and rights in the new company equal to those they had in the previous company. Thus they need to be compensated for the shares and rights they are deprived of as a result of their dismissal. This is called a compensation payment. The compensation payment does not have to be made in cash; it may be some other consideration. For example, it may be the shares of another company. This also enables cross mergers. But if compensation payments are provided for, the voting majority needed for mergers will be increased; the affirmative votes of more shareholders will be necessary.

There are two basic documents for merger: the merger agreement and the merger report.

The merger agreement is addressed in the Draft Code in detail; the required provisions and the minimum mandatory features are stipulated. The merger agreement must be in writing. It is signed by the management and approved by the general assembly. Such an agreement is made in all mergers in practice. The merger report meanwhile sets forth the purpose of the merger, its economic and legal consequences, its results for the shareholders and how creditors are protected. It is possible to say that the merger report discloses the grounds for the merger. Waiver of the merger report is possible for medium and small-sized companies.


The Draft Code gives a special importance to audits. The merger agreement, the merger report and the balance that the merger is based on are audited by the transaction auditor. The transaction auditor prepares an audit report. This audit may be waived for small-sized companies. In addition to an audit, the creditors of the company and others who have an interest in the merger are entitled to conduct an examination. All of the documents and information on which the merger are based are submitted for review by not only the shareholders, but also – this is the special feature – the usage shareholders, the owners of securities and any interested parties, including the creditors. Again, the right to review may be waived for small-sized companies.

Decision to merge

The merging companies separately decide on the merger in their own general assemblies. There are different voting majority for different company types. It must be noted that there are higher voting majorities for any companies if a compensation payment will be affected; that majority is 90%. If the subject matter of the company is amended – which is possible – the scope of the activities of the merging companies may also be changed. In such cases, the procedure and voting majority for the amendment of the articles of association must be implemented.

Capital increase

It is natural that the acquiring company will increase its capital as a result of the merger, with certain exclusions, so that it gives shares to the shareholders of the acquired company. Thus the capital increase is to be appropriate for the equalization payment which is supposed to be effected as a result of the merger. This is not a mandatory rule. There may be some mergers where a capital increase is not necessary, such as the merger of a parent company with an affiliate. Of course, the capital increase will follow the procedure required for the amendment of the articles of association; however, the provisions concerning capital in kind are not applicable. Furthermore, the provisions concerning contribution of capital in kind to the new company are not applicable in mergers establishing new companies.

Facilitated merger

The many stages stipulated for preparation, audit and review may be facilitated. For example, an affiliate is merging with the parent company, or a company is acquiring another company in which it holds all or a majority of the shares. There is no need to realize all the formalities. According to facilitated merger, if the shareholding structures of the merging companies are somewhat similar, then certain transactions may be waived. Within this framework, it is possible to avoid preparing a merger report; the audit and examination rights may be waived; and the merger agreement need not be voted on in the general assemblies.


Merger decisions are to be registered in the trade registry. Any decisions as to capital increases or other amendments of the articles of association, if any, must also be registered. Upon registry, the merger enters into force, the full succession is realized, the acquired company ceases to exist and the shareholders of the acquired company become the shareholders of the acquiring company. The provisions of the Code on the Protection of Competition are preserved. If a control change is concerned and certain thresholds are exceeded, the approval of the Competition Board is necessary.

Protection of creditors

There are detailed provisions on the protection of creditors in the Draft Code. Creditors are entitled to request a warranty; however, the report of the transaction auditor may determine that such warranty is not necessary. Even if the report finds it necessary, the company may choose to pay the debt instead of giving a warranty. In other words, it is possible to continue the merger by giving a warranty to the creditors or by paying the debts. The aim of this provision is to prevent the frustration or delay of the merger procedure upon the exercise of certain rights by the debtors or shareholders.

Transfer of labour relations

How will the employees be transferred? What will be the rights of the employees of the acquired company? There are detailed provisions on these issues in the Draft Code. Although it is not expressly prescribed by the Draft Code, the merger is a fundamental change in the working conditions. The employee will be free to continue working or to quit working. The merger will constitute a justified ground for termination of the labour agreement by the employee. As there is a justified ground of termination, the employee will be entitled to severance pay. If the employee continues working, his or her seniority rights in the acquired company will pass to the acquiring company.

There are also provisions concerning the personal liabilities of the shareholders in the Draft Code. The personal liabilities existing before the transfer continue for three years.

The scrutiny of company shares and rights

This is a new type of lawsuit. Of course, it is possible to initiate a lawsuit for the cancellation of the general assembly decision pertaining to the merger. However, this new type of lawsuit is different. A breach of rights is claimed in this lawsuit. The merger is not suspended upon such claim, but it is possible to require equalization. Thus, the initiation of this lawsuit does not delay the merger.

Liability arising out of merger

Many people, including transaction auditors or managers are involved in the merger and all these persons have liability. This is a fault liability. Of course, the liability of the founders is preserved, and certain liabilities arising out of affiliate companies' law continue.

It may seem as if the principles concerning the mergers are not amended by the Draft Code. It is possible to say that nothing has changed in the main structure and construction of the merger. However, the issues which cause problems in practice, such as the condition mandating the types of the merging companies to be the same, are eliminated. The gaps in the TCC are filled. The detailed provisions on the merger agreement are very important. The procedures and stages of merger are clarified. You may see a very clear road map upon review of the provisions on mergers. The duties and roles of different organs and their scope are clarified. Transparency is achieved in mergers since audits and reports are required and declaration, disclosure and review of these are possible. In my opinion, a "system promoting mergers" may be a suitable slogan or headline for the provisions concerning mergers. The rights of the creditors and shareholders are protected. However, they will not be allowed to block or prevent the merger and a balance is thus achieved.


About the author

Ercüment Erdem is the senior partner of Erdem & Erdem. He specialises in commercial law (international and national), energy law, project finance (including BOO and BOT models), capital markets law, contracts, corporate law, privatisation law, international commercial arbitration, corporate finance, law of obligations, private international law, industrial property law, law of trade marks and copyright, competition law, international leasing, mergers and acquisitions and international construction law.

He is also professor of commercial law at Galatasaray University Law School (Istanbul) where he teaches law of negotiable instruments, corporate law, competition law and international commercial law. He speaks French, English and German.


Istanbul Bar Association; ICC Institute Council; ICC Incoterms Experts Group; ICC Turkish National Committee Arbitration Council; Vice Chair of ICC Commercial Law and Practice Commission; Member of several ICC Task Forces; Association Henri Capitant des amis de la culture juridique française; Banking and Commercial Law Institute; Competition Law Association.

Contact information

Ercüment Erdem

Erdem & Erdem

Law Offices Valikonagi Caddesi Basaran Apt No 21/1 Nisantasi 34367 Istanbul

Tel: +90 212 291 73 83

Fax: +90 212 291 73 82




About the author

Özgür Kocabasoglu is a partner in the corporate affairs department of Erdem & Erdem. He specialises in commercial law, company law, law of obligations, contract law, banking and finance law, private international law, international construction law, real estate law, foreign investment, mergers and acquisitions, labor law and general litigation.

He represents foreign and local clients in merger and acquisition projects and acts as counsel for local and international companies on daily corporate issues and litigations.

He is a member of the Istanbul Bar Association and speaks Turkish, English and French

Contact information

Özgür Kocabasoglu

Erdem & Erdem

Law Offices Valikonagi Caddesi Basaran Apt No 21/1 Nisantasi 34367 Istanbul

Tel: +90 212 291 73 83

Fax: +90 212 291 73 82



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