Key issues


What measures should be taken to best prepare for a corporate reorganisation?

Before corporate reorganisation, it is essential to make a structure-related analysis to see if the needs for reorganisation can be matched with the type of organisation planned, as well as an assessment of the possibility of satisfying the requisite minimum corporate requirements for the relevant reorganisation transactions (shareholders’ approval, board of directors’ approval, and in some cases creditors’ approval).

Legal, tax, technical, and financial due diligence, especially for accounting books, financial tables, tax returns, contracts, employment matters, licences, and permits, must be done to determine the optimum conditions precedent for a proper reorganisation and to understand and manage the implications of the reorganisation. During this due diligence stage, any regulatory appraisal work or financial table confirmation work conducted by sworn-in certified public accountants or certified public accountants will also be simultaneously undertaken to prepare the underlying documentation for the corporate approval processes.

Most of the reorganisation work requires appraisal of the companies involved, so an appraisal by independent experts should be organised.

Employment issues

What are the main issues relating to employees and employment contracts to consider in a corporate reorganisation?

Corporate reorganisations may be categorised as ‘transfers of workplace’ under Turkish law. As per article 178 of the TCC and article 6 of the Turkish Labour Code (TLC), unless employees object, employment agreements executed with the transferor company will be transferred to the surviving or the acquiring entity together with all of the rights and obligations that have accrued until the date of transfer. Thus, the transferor ceases to be liable for any employment-related rights that arise after the date of transfer and the surviving or the acquiring entity becomes liable from the start date of the initial employment. For liabilities that accrued prior to the reorganisation, the transferor and the acquiring entity will be held jointly liable for two years as of the date of reorganisation, after which the transferor company (if it still exists) will cease to be liable. However, the above-mentioned two-year liability limit will not apply to joint liability regarding severance pay. The transferor and the surviving or the acquiring entity will be held jointly liable for severance pay without a time limit. The issue of joint liability is not applicable in cases where one of the entities is dissolved after reorganisation and instead the surviving entity will have sole liability.

In practice, sometimes the parties involved prefer to arrange a net cut-off for pre and post-organisation liabilities relating to employees (in cases of merger through new company formation) and instead opt for terminating the existing employment agreements with the employees of the transferor company (by fully paying the requisite termination rights) and executing new agreements between these employees and the acquiring entity. Employment agreements should be terminated upon payment of all employment-related accrued rights that become due on the date of termination (eg, notice pay, severance pay, and annual paid leave). Following termination, the transferor will fully pay the termination-related rights and in return will obtain a release letter from the employee stipulating that he or she does not have any outstanding receivables from the employer as of the date of reorganisation. Such arrangements mostly cover the monetary aspect of the rights accrued up until the date of reorganisation; however, even though legally a new contract is executed with the new acquiring entity, the date of this contract will not reset the term of the employee’s employment, and while calculating employment-related rights of the employee in the future, the term with the initial employer must be taken into consideration. Furthermore, the terms of the new employment contract should not aggravate the previous employment terms, as the new employer may only amend such terms with the written consent of the employee.

Corporate reorganisation alone does not grant the relevant parties involved the right to terminate employment agreements. However, if the address of the workplace, the title, salary, or any other material employment condition is changed or otherwise affected owing to reorganisation, such change will necessitate the employee’s consent, which must be provided within six days following the written notification of the change to the employee by the employer. In the absence of the employee’s consent, the employee will not be bound by such change and the employer may terminate the employment agreement for just cause by serving a written notification to the employee stating that the change has been made on valid grounds. As per court precedent, a valid ground for termination should originate from the employee or business requirements of the employer and such change should be one that the employee is reasonably expected to accept. The employee is not directly entitled to terminate their employment contract in the case of change of material work conditions under the TLC; however, ‘non-implementation of work conditions’ is stated as just cause for an employee to terminate his or her employment agreement. Under article 24 of the TLC, the employee may assert the change of material working conditions as a valid ground for termination. Turkish courts have an employee-friendly approach when analysing the existence and appropriateness of just cause and valid cause.

Also, as per article 5 of the TLC, the employer has the obligation to observe equality between employees who are of the same status unless there is a valid reason to differentiate their treatment. Therefore, in mergers, the employment terms of the transferred employees should be reviewed to determine if there are any differences in the employment terms of the existing employees of the merged entity in light of this equality principle. In such case, the employee with the lower conditions should be granted additional benefits.

Finally, the status of collective bargaining agreements (CBA) in transfers of business is regulated under the unions and Collective Bargaining Law No. 6356 published in the Official Gazette dated 7 November 2012 and numbered 28460 (the Collective Bargaining Law). By analogy, the transfer of business-related provisions is applicable to corporate reorganisations. If only one of the entities in a reorganisation has a CBA, then the other entity will also become bound by the terms and conditions of the same CBA following reorganisation. However, if all of the entities involved in a corporate reorganisation are party to a CBA and if all workplaces are operating in the same line of business, then the CBA executed by the surviving entity or the acquiring entity will be treated as an employment agreement. Nevertheless, employees are entitled to benefit from the CBA that provides a broader set of rights and benefits to them.

What are the main issues relating to pensions and other benefits to consider in a corporate reorganisation?

Under Turkish law, fringe benefits, including pensions, are considered part of the employee’s salary, notwithstanding such benefit being clearly stated in an employment agreement or established through consistent workplace practice. As explained in question 8, in the case of transfer of employment agreements through corporate reorganisation, the terms and conditions of an existing employment agreement should remain intact and should not be amended to the detriment of the employee without his or her written consent (see question 8 for detailed information on the termination rights that will arise from amendment of the material terms of an employment agreement). Therefore, the reorganised company has an obligation to retain the benefits that were available prior to corporate reorganisation. The transferor and acquiring entity will be held jointly liable for two years for the benefits accrued up until the date of corporate restructuring, after which date the liability of the transferor (if the company still exists) will cease.

Financial assistance

Is financial assistance prohibited or restricted in your jurisdiction?

For corporate reorganisations involving or otherwise resulting in a company acquiring its own shares, article 380 of the TCC imposes a financial assistance restriction. According to this clause, any legal transaction related to provisions for advance payment, loan, or security interest by a company to a third party made for such third party to acquire the company’s shares will be deemed null and void. This financial assistance restriction will not apply to transactions performed by banks or financial institutions in their ordinary course of business, and transactions whereby an advance payment, loan, or security is provided to the company’s or its subsidiaries’ employees for the purpose of such employees’ acquisition of the company’s shares. Nevertheless, if these exempt transactions reduce the reserves of a company below the levels specified in the relevant laws and the company’s articles of association or prohibit the company from putting aside the necessary statutory reserves, even such exempt transactions will also be deemed null and void.

Furthermore, debt push-down of interest expenses in leveraged buyouts (LBO) is also problematic because, despite the absence of a clear provision in Turkish tax legislation, in practice the tax authority considers these expenses not tax-deductible.

Common problems

What are the most commonly overlooked issues or frequently asked questions in a corporate reorganisation?

The following are examples of main issues overlooked in corporate reorganisations: structure-wise and liability-wise, negative equity (ie, eroded share capital) or technical insolvency and the availability of distributable reserves (especially in demergers); contractual-wise, change-of control provisions; and business-wise, strategies for maintaining the integrity of the business in partial spin-offs.

Article 376 of the TCC and article 179 of Turkish Execution and Bankruptcy Code No. 2004 stipulate that if the share capital of a company is below certain thresholds owing to the accumulated losses of past exercises, the company is deemed to be technically insolvent or bankrupt. In a merger, the other merging entity must have sufficient net assets to absorb this accumulated loss and top up the negative equity, otherwise the merger cannot be accomplished. Negative equity also imposes several obligations on the board of directors to take certain corporate actions which vary depending on the level of eroded equity, from half to two-thirds or more, and range from notifying and informing the shareholders and getting approval for remedy actions to resolving upon capital decreases or increases (with cash injections) and preparing interim balance sheets prepared per business on a going concern basis and per actual sale value of assets, etc.

For tax-neutral partial spin-offs, the integrity of the production or service business must be maintained in the new company. Therefore, the assets and liabilities of the production or service business cannot be spun-off separately in tax-neutral corporate reorganisations.

Maintaining proper continuity of contractual ecosystems of reorganised entities through pre-reorganisation due diligence, and introducing proper checks and balances in order to determine and manage change of control approval or simple pre-notifications out of courtesy, as well as managing conflicts of interest situations, are also sometimes overlooked in corporate reorganisations.

Accounting and tax

Accounting and valuation

How will the corporate reorganisation be treated from an accounting perspective? How are target assets and businesses valued?

Corporate reorganisations are treated as share sales, spin-offs, or share swaps. If the assets and liabilities are transferred with their book values and the other requirements in corporate income tax law are fulfilled, the spin-off is tax neutral. Regardless of whether or not the spin-off is tax neutral, the target business is valued at the fair value (market price) for share distribution after the reorganisation.

Accounting firms and financial advisors are involved for the accounting and valuation of the companies.

Tax issues

What tax issues need to be considered? What are the tax implications of carrying out a corporate reorganisation?

The CIT Law regulates the tax aspects of corporate reorganisations. According to article 18 of the CIT Law, profit due to a merger is subject to corporate tax. On the other hand, articles 19 and 20 stipulate the conditions of tax-neutral corporate reorganisations.

In this context, for acquisitions, if the acquiree and the acquiror are both Turkish residents (have their legal or administrative centre in Turkey) and the assets and liabilities of the acquiree are transferred to the acquiror’s accounting books on their book values, and the other conditions stipulated in article 20 of the CIT Law are fulfilled, the acquisition will be corporate tax neutral. Corporate-type changes under these same circumstances are also considered tax neutral.

For full spin-off operations in which a full taxpayer capital company (limited liability partnership or joint stock corporation ) transfers all of its assets and liabilities to two or more existing or newly established full taxpayer capital companies and the shares of these existing or newly established companies are given to the shareholders of the spun-off company, the full spin-off will be corporate tax neutral provided that other conditions stipulated in article 20 of the CIT Law are fulfilled.

For partial spin-off operations in which a full taxpayer capital company or a foreign capital company’s Turkish branch transfers its real estate, subsidiaries, affiliates held for more than two years, production, or service businesses to an existing or newly established full taxpayer capital company and the shares of this existing or newly established company are given to either the spun-off company or its shareholders, this partial spin-off will be corporate tax neutral provided that the other conditions stipulated in article 20 of the CIT Law are fulfilled.

For share swap operations in which a full taxpayer capital company acquires administrative control and the share majority of another capital company and transfers its shares to the shareholders of the acquired company in return, this share swap will be corporate tax neutral provided that other conditions stipulated in article 20 of the CIT Law are fulfilled.

According to article 17 of the VAT Law, the delivery of share certificates and shares of other participation investments held for more than two years are exempt from VAT.

According to the Stamp Tax Law, the papers related to corporate reorganisations performed according to articles 19 and 20 of the CIT Law are exempt from the stamp tax.

Accounting firms, sworn-in certified public accountants, and fiscal advisors are to be involved for tax-neutral corporate reorganisations.