Due diligence and disclosureScope of due diligence
What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?
Most typically, the scope of due diligence will include legal, financial and tax matters. Commercial due diligence is also sometimes undertaken, in particular in more niche industries. Environmental, social and governance due diligence exercises are also becoming increasingly common in line with the increasing interest of international finance institutions and development finance institutions in the Turkish M&A market.
Legal due diligence generally covers the following:
- due incorporation of the entity;
- legal solvency of the entity;
- corporate governance;
- terms of contracts binding the entity, including leases and credit agreements;
- key suppliers and distributors where applicable;
- litigation and disputes;
- employee matters including contracts, disputes and benefits;
- intellectual and real property;
- physical assets;
- permits and licences;
- compliance with the law including specialised areas such as competition law and data privacy.
Financial and tax due diligence aims at providing an accurate picture of the company’s financial and tax statuses to assist with valuation, deal structuring as well as certain SPA provisions.
Depending on the size of the target, and its sophistication and level of preparedness, the diligence process can take anywhere between several weeks to several months.
It is not very common for sellers to provide due diligence reports to prospective buyers, although comprehensive information memoranda are often available to prospective buyers if an M&A adviser is involved on the sell side.Liability for statements
Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?
Under article 36 of the Code of Obligations, if a party to an agreement’s fraudulent act causes the other party to enter into an agreement, such agreement will not be binding on the party who was victim to the fraud even if the misleading caused by the fraud is not material. As such, a seller is normally liable for pre-contractual misrepresentations amounting to fraud regardless of any limitations the parties may include in the SPA. That being said, aside from fraud, SPA terms can normally limit a seller’s liability for pre-contractual statements, although it may not always be statutorily permitted to limit the knowledge of the buyer to specific disclosures in cases where the buyer knows or should know of a defect.Publicly available information
What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?
Turkish companies are required to make filings with the trade registry in the sub-national jurisdiction in which they are domiciled. Each trade registry maintains public records that include the information listed below; however, it should be noted that each trade registry has its own method of maintaining and making available such records, so the speed and ease with which such records are obtainable may vary from jurisdiction to jurisdiction. In addition to the trade registries, certain government agencies also maintain public records relating to private companies. The following information regarding Turkish private companies is generally publicly available, and is often searched for during the buyer’s preliminary due diligence:
- articles of association;
- scope of the business;
- amount of capital;
- changes in the capital since incorporation;
- former and current shareholders (always publicly available for limited companies; in joint-stock companies, the identities of the founding shareholders are publicly available, but subsequent shareholders will normally not be publicly available unless there was a triggering event that required registration with the trade registry);
- former and current board members;
- those board and general assembly resolutions that are required by law to be registered with the trade registry; and
- patents and trademarks held.
Real estate held by a private company can sometimes be found through public searches, but it is not always possible for a party not affiliated with the entity to access such information. Generally, information regarding court cases to which a private company is a party and court decisions implicating a private company are not public information in Turkey.Impact of deemed or actual knowledge
What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?
A buyer’s knowledge of a misrepresentation or undisclosed conditions normally precludes it from making claims against a seller regarding such under Turkish law. While many SPAs include sandbagging provisions allowing claims by the buyer regardless of knowledge, as discussed in question 14, such provisions (at least in their strict forms) are of questionable enforceability under Turkish law.