Detailed Guide on Company Splits in Turkey
Company splits in Turkey are regulated under the Turkish Commercial Code (TCC), and they involve dividing a company into two or more separate entities. The split can occur in different ways, depending on the goals and structure of the transaction. Similar to mergers, CSs require careful legal, financial, and procedural adherence.
Here’s a detailed guide on CSs, including the types of splits, legal requirements, and the process:
I. Types of CSs
Under the Turkish Commercial Code (TCC), a CS (or demerger) can take one of two main forms:
1. Split by Absorption
- In this type of split, one or more parts of the company’s assets, liabilities, and operations are transferred to an existing company (or companies). The original company ceases to exist as a legal entity, while the receiving company continues its operations.
- The receiving company absorbs specific parts of the original company’s business and assets, and the shareholders of the original company receive shares in the receiving company in exchange for their shares.
2. Split by Establishment of New Companies
- This type of split involves the creation of one or more new companies. The assets and liabilities of the original company are divided among these new entities.
- The original company ceases to exist or continues in a modified form, and shareholders of the original company receive shares in the newly formed companies in exchange for their old shares.
II. Legal Framework for CSs
Turkish Commercial Code
The legal basis for CSs is outlined in the Turkish Commercial Code (TCC), which specifically governs mergers, demergers, and other forms of corporate restructuring.
Additional Laws
- Competition Law: If the split involves companies with significant market shares, approval from the Turkish Competition Authority may be required, especially if it is believed that the transaction could harm competition.
- Capital Markets Law: If the company being split is a public company, the process will also need to comply with the Capital Markets Board (SPK) regulations, which govern share exchange ratios, public disclosure, and fair treatment of minority shareholders.
III. Steps for a CS
The process of splitting a company involves several steps, which are broadly similar to those of a merger, but there are distinct differences, especially in the creation of new entities or the transfer of assets.
Step 1: Preparation and Feasibility Study
- Due Diligence: A thorough due diligence process must be conducted to evaluate the financial, legal, and operational aspects of the company. This is necessary to understand the potential impact of the split on assets, liabilities, employees, and shareholders.
- Split Agreement: The company must prepare a split agreement, which outlines the specific assets, liabilities, and operations being transferred, the structure of the new entities (if applicable), the share exchange ratio, and the rights of shareholders and employees.
Step 2: Shareholder Approval
- The General Assembly (shareholders’ meeting) must approve the split agreement. This requires a vote by the shareholders, and the approval is generally subject to a supermajority (usually at least 2/3 of the shareholders).
- The Articles of Association of the company may also need to be amended to reflect the changes in the company structure following the split.
Step 3: Valuation and Expert Opinion
- The value of the assets and liabilities being transferred as part of the split must be determined. In many cases, an independent expert is required to provide an objective valuation of the assets, share exchange ratio, and any adjustments needed.
- The expert’s report must be shared with shareholders before the General Assembly’s approval.
Step 4: Filing with the Trade Registry
- Once the General Assembly approves the split, the company must file the split documents, including the split agreement, valuation reports, and share exchange ratio, with the Trade Registry.
- If a new company is being established, it will need to be registered with the Trade Registry as well.
Step 5: Approval from the Competition Authority
- If the companies involved in the split meet specific financial or market dominance thresholds, the transaction must be reviewed and approved by the Turkish Competition Authority (Rekabet Kurumu).
- The Authority will assess whether the split would negatively impact market competition. If so, it can impose conditions on the split or block the transaction entirely.
Step 6: SPK Approval (If Public Companies Are Involved)
- If one or both of the companies involved in the split are public companies, the Capital Markets Board (SPK) will need to approve the transaction. The SPK’s role includes ensuring fair treatment of shareholders, especially minority shareholders, and reviewing the share exchange ratio.
Step 7: Implementation
- After all approvals, the transaction is implemented by transferring the relevant assets, liabilities, and operations to the newly formed companies or absorbing companies.
- The split will be recorded, and the changes will be reflected in the company’s official records, including the Trade Registry, financial statements, and shareholder registers.
IV. Conditions for Splitting a Company
Several legal and practical conditions must be met for a CS to proceed smoothly:
1. Financial Condition
The company’s financial health and asset/liability structure must be carefully assessed. The division of assets and liabilities needs to be fair and proportional to the shareholders’ interests.
2. Approval of Shareholders
The split must be approved by the General Assembly of the company. This typically requires a supermajority vote, which may vary depending on the Articles of Association.
Shareholders of the original company must receive detailed information about how their shares will be exchanged, how the split will affect their rights, and the impact on the company’s future.
3. Protection of Employees
Employee rights must be considered, especially regarding the transfer of employment contracts and employee benefits.
The company must ensure that any employees who are transferred to the new entity (or entities) retain their rights and benefits under Turkish labor law.
4. Fairness of the Split
The split must be fair to all shareholders, and the share exchange ratio must be reasonable. If necessary, an independent expert must be appointed to assess the fairness of the exchange ratio and the value of the assets being transferred.
5. Tax Implications
The split may have significant tax implications, especially with regard to capital gains tax, value-added tax (VAT), and other transfer taxes.
Companies should seek tax advice to ensure that the split is structured in a tax-efficient manner and in compliance with Turkish tax laws.
V. Advantages of CSs
1. Focused Operations
Splitting a company allows the resulting entities to focus on specific business segments, which can lead to better management and more specialized operations.
2. Improved Financial Structure
The split can help streamline operations, reduce debt, and improve the overall financial health of the companies involved.
3. Risk Mitigation
By splitting a company, the risk is often spread across different entities, reducing the impact of potential business or market challenges faced by one segment of the company.
4. Strategic Flexibility
A split can create more flexibility for future investments, partnerships, and acquisitions. Each of the new entities can pursue its own strategic goals independently.
VI. Challenges of CSs
1. Complexity and Costs
The process of splitting a company is complex, requiring significant legal, financial, and administrative work. This includes legal documentation, valuation, shareholder approvals, and regulatory filings. The associated costs can be significant.
2. Cultural Integration
After the split, each new company must manage its corporate culture and align its management and operations. This may lead to internal conflicts or inefficiencies.
3. Employee Impact
The transfer of employees between companies can lead to challenges in terms of employee morale, retention, and ensuring compliance with labor laws.
4. Regulatory Scrutiny
Depending on the size and nature of the companies involved, the transaction may be subject to scrutiny from regulatory bodies, such as the Competition Authority or SPK.
Company splits in Turkey can be an effective way to restructure a business, allowing companies to focus on specific areas of operation or reduce risk. However, they are complex processes that require careful planning, regulatory approval, and a strong understanding of Turkish corporate law. Companies wishing to split should seek legal and financial advice to navigate the process effectively and ensure compliance with all legal and regulatory requirements. Please feel free to contact us for more information and further inquiries about our unique services. You can also subscribe to Tacirsoft Hukuk Bilgi Sistemi, that is Turkey’s only Corporate Law and Organized Industrial Zones Law database.
