Acquisition of Shares Merger of Subsidiary and Parent Company
In article 136 of the Law. No 6102 Turkish Commercial Code (“TCC”), it is regulated that companies can merge through; (i) takeover of another company, technical term as “merger by takeover” or (ii) come together in a new company, technical term “merger as a new establishment”. The merger of a sub-company (“sub-company”) and the parent company within the sub-company, which is the sole shareholder of this subsidiary, within the scope of the TCC is considered as a “merger in the form of an acquisition”, and in practice it is called a “reverse merger”. In this article, the applicability of the merger of the subsidiary and the parent company within the scope of the TCC will be evaluated in the context of the “Prohibition of Acquiring Companies’ Own Shares in return for a consideration” regulated in Article 379 of the TCC.
II. PROHIBITION OF COMPANIES TO ACQUIRE THEIR OWN SHARES IN RETURN FOR CONSIDERATION AND THE CONNECTION WITH REVERSE MERGER
Pursuant to TCC 379/p.1, it is prohibited for a company to acquire or accept pledge its own shares in return for consideration, at an amount which exceeds or will exceed as a result of a transaction, one-tenth of its basic or issued capital. According to the 4th paragraph of the same article, the prohibition shall also be applied in case that the parent company’s shares are acquired by its sub-company. Hence, it should be evaluated whether the merger between the sub-company and the parent company constitutes a “share acquisition in return for consideration”.
Acquisition of a company’s own shares can occur as a result of purchase, exchange, donation, inheritance, merger, acquisition. Therefore, the acquisition of the parent company’s shares by the sub-company in line with the merger by takeover is also considered as a share acquisition. On the other hand, the acquisition of the shares in return for consideration will occur if a certain exchange is made in return for the shares taken over. Transfer of shares in return for a certain amount is the most common example of acquisition in return for consideration. Merger is defined as “The transfer of the assets of one or more companies to one of them or to a newly established company spontaneously and total succession, without being liquidated; thus, the assets are combined and the shareholders of the dissolving company automatically gain a partnership share in the merged company, according to a calculated exchange ratio (merger coefficient) in return for the transferred assets”. Therefore, in the merger through takeover, the shareholders of the assignee company acquire a partnership share in the transferee company in return for the acquisition of the shares of the transferee company. In this context, it is considered that the merger of companies should be considered as a share acquisition in return for consideration. Thereupon, since the acquisition of the parent company’s shares by the sub-company as a result of the merger constitutes a “share acquisition in return for consideration“, it is not possible to apply the reverse merger in principle. However, in Article 382 of TCC an exception to the mentioned rule is regulated. One of these exceptions is the situations that are “necessity of the rule of complete succession“.
Complete succession can only be in the cases specified in the law. Pursuant to TCC article 136/p.4; “The transferee takes over the wealth of assignee as a whole via merger. The company merged by acquisition dissolves without liqudiation and is deregistered from trade registry.” The legal regulation in question includes the principle of complete succession, emphasizing the principles of continuity of the title of shareholder, in other words, the company’s share and assets. “Complete succession, as the opposite concept of partial succession, is the transfer of all rights, receivables and debts constituting an asset to someone else as a whole. Complete succession only occurs in cases expressly regulated by law. With the statement in article 151 of TCC “…….. all rights and debts are transferred to the remaining or established company…”, the principle of complete succession is adopted in the merger by adjudicating that all rights and debts of the company that transfer or participate in the new establishment will be transferred to the transferee or newly established company…” The said opinion is regarding the article 151 of the former TCC on the outcome of the merger and in the article 153/p.1 of TTC titled “Legal Results”; “The merger takes effect upon the registration of the merger at the trade registry. At the instance of registration, all assets and liabilities of the assignee are automatically transferred to the transferee.” The continuation of the principle of complete succession in merger is adopted.
At the same time, the existence of the principle of complete succession is indicated by stating; “as a result of the principle of total succession, the transfer of assets in the merger takes place in a single transaction and spontaneously.”
In addition, in the justification of article 382/1-b of the TCC, which regulates the exception of the complete succession in the acquisition of the company’s own shares in return for consideration, it is clearly stated that the merger results in a complete succession; “The second paragraph is about the shares acquired by means of merger, division and inheritance. Undoubtedly, the provision also partially includes complete succession.” At this point, it is considered that the merger will result in complete succession and it is possible for the sub-company to acquire parent company’s shares as a result of the merger within the scope of the TCC.
III. PRINCIPLE OF SHARE OWNERSHIP CONTINUITY
The right of the shareholders of the dissolving company to continue spontaneously on the shares of the company that took over, both through a takeover and through a merger as a new establishment, in accordance with the membership status, partnership shares and rights at a duly determined exchange rate, is called the principle of continued share ownership. Therefore, as a result of the merger of the sub-company and the parent company within the sub-company, the shareholders of the parent company will acquire a shareholding in the sub-company.
The merger of the subsidiary by taking over the parent company is defined as a “reverse merger” in practice, and the acquisition of the shares of the parent company by the sub-company is subject to the strict limitations of the companies acquiring its own shares in return of a consideration specified in the TCC. However, a merger within the scope of the TCC results in “complete succession” and constitutes an exception to the prudent acquisition of companies’ own shares and indirectly to the application of limitations on the acquisition of the parent company’s shares by the sub-company. As a result of the merger, the shareholders of the dissolving parent company will acquire the title of shareholder in the sub-company in accordance with the “continuation of the shareholding principle”.
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