11 Apr

The one of the most significant principle in an M&A transaction is “the principle of maintenance of partnership structure” (or the maintenance principle) under Turkish Commercial Code. As is known, result of a merger and acquisition transaction affects twomain actors: the first one is the company itself and the second is shareholders of the companyin fact maintenance of the partnership structure is a result of the second affect of an M&A transaction. Maintenance of the partnership structure under Turkish Commercial Code meanspreserving the rights of each partner in the transferor or merged company, and right to request value and rights of their existing stock in the transferor or merged company or equipotentstocks or rights from the transferee company. The maintenance principle can be described as equality which provides partners of transferor or merged company to be new shareholders in transferee company as much as transferor or merged company’s shareholders equity. This equality does not only mean nominal value of the stocks but also the rights that stocks provide to the shareholders in the transferee company.

Exchange of Stocks

The principle is a compulsory legal rule which is foreseen in Turkish Commercial Code. The main legal protection is in this principle is to maintain a shareholder’s right in the transfereecompany as well as it was in his/her transferor company.

The principle of exchange of stocks completes the principle of maintenance of partnership structure. Shareholders continue to be shareholder in the transferee company however their capital remains same as before. In case of share capital increase in transferee company their capital ratio decreases inversely.

In case of exchange of privileged shares, the privileged rights which are provided to privileged shareholder must be determined and described in the merger agreement and the same rights must be obtained in return or otherwise money’s worth must be given for these privileged shares.

As a result of principle of maintenance of partnership structure, the transferee company is obliged to increase its capital to give the rights of shareholders of the transferor or merged company. As is mentioned above, shareholders of transferor company have right to maintenance their shareholder status in transferee company.

Equalization Payment

Equalization payment is an exception of the principle of maintenance of partnership structurebecause in this situation, shareholders cannot obtain new shares in return for their old shares. Shareholders must be paid in kind or cash.

In case of determination of the equalization payments, it is possible to pay up to 10 % of actual value of the stocks exchanged. This 10 % is an upper limit for equalization payments. However, if the commercial court decides to equalization payments,(please see “right to sue”below) this upper limit is no longer valid for the shareholders of the company. Because this is a cash payment, equalization payments are an exception of the maintenance principle.

Calculation of Right to Claim

Under Turkish Commercial Code, in principal, several conditions are described in regard of calculation of shareholders’ rights to claim. The calculation method includes every single item which affects the share value such as M&A transaction parties’ assets and shareholders equity, distribution of voting rights of the shareholders of the transferor company, nominal value of the shares and premium stocks.

The shares are mostly calculated according to current value of the time when the merger agreement has been signed.  The calculation of the current value of the shares is “a must” in a merger agreement.

Right to Sue

Unless the main elements which affect share valuation of transferor or merged company are taken into consideration in a merger agreement, each shareholder has right to sue against the merger and acquisition transaction or to request protection of their partnership status. Each shareholder has capacity to sue against the merger and acquisition transactions within two months demanding of determination of their share value after the M&A decision of companywas declared in Turkish Trade Registry Gazette.

By this lawsuit which is called “equalization suit”, authorized commercial court will be able to monitor whole M&A process. Hereunder, commercial court may decide the company to pay equalization payment to shareholder of the company or annul the transactions which aresubject to Merger and Acquisitions of the companies.

As it is mentioned above, shareholders have right to sue against M&A transactions  within two months after the M&A decision of company is declared in Turkish Trade Registry Gazette. This term is a final term so that the judge will apply the principle of ex officio examination for term of litigation.


Herdem Law Firm, Istanbul Turkey

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