COMPANY LAW II PROJECT:

Corporate Governance in M & A Transactions

By Satvisa Pattanayak

Roll No. 1683076

BA LLB (B)
I. Introduction

This article is prepared for demonstrating the role corporate governance issues play in mergers &
acquisitions ("M&A"). The term "corporate governance" can be briefly defined as rules
introduced by the articles of association of companies, regulations on representation and binding
of a company, and mandatory rules of law, which regulate the day-to-day activities, relations
between the shareholders, responsibilities and obligations of the directors as well as the
shareholders. A provision in the articles of association of the target company in an M&A
transaction may derail the contemplated transaction. Moreover, following completion of the
transaction minority or majority shareholders and directors may face difficulties and be restricted
in running the operations of the company. For these reasons, it is very important to be able to
plan the closing and post-closing corporate governance issues of the target company in an M&A
transaction.

II. Limitation on Share Transfers

An M&A transaction can as well be structured in the form of a "share transfer". In accordance
with the Turkish Commercial Code numbered 6102 ("TCC"), as a general rule, except as
otherwise provided under articles of association of a company, in joint stock companies shares
can be freely transferred.

Notwithstanding the foregoing, according to article 491 of the TCC, registered shares that have
not been totally paid-in, may only be transferred upon the approval of the target company
(exceptions to the rule being, share transfers realized by means of inheritance, marital property
regime between spouses, or enforcement procedures). In spite of this restriction, the TCC
provides that the target company can only refuse to approve the share transfer in the event that
the transferee's financial ability raises doubts and if any, security requested by the target
company is not provided by the transferee.

According to article 491 of the TCC; the articles of association may stipulate that registered
shares can only be transferred by obtaining the company's approval. As a very specific
mandatory rule of the TCC, article 493 (7) provides that the articles of association cannot
aggravate restrictive conditions for share transfers. However, the articles of association may
grant rights to the non-transferring shareholders such as right of first offer, tag-along or drag-
along rights.

According to article 493 of the TCC, the target company may block the share transfer on the
basis of an "important reason" (which must be related to the "economic independence of the
company", or "composition of the shareholders") as stated under the articles of association, or by
offering to purchase the said shares from the transferring shareholder on their actual value at the
time of the purchase request, on behalf of the company, its shareholders or third parties.

The transferee may request from the commercial court of first instance placed in the company's
headquarters determination of the actual value of the sale shares. In case the transferee does not
reject the amount determined by the court within one month of the determination, the transferee
is deemed to have accepted the company's purchase offer.

According to article 494, if approval of the company to the share transfer cannot be obtained,
ownership of the shares and all rights related thereto shall remain with the transferor. In case the
company does not reject the share transfer within three months as of the request date, the
approval is deemed obtained.

As far as share transfers in limited liability companies are concerned, there are similar restrictive
provisions in the TCC however, as share transfers in limited liability companies present tax
disadvantages for the sell side, this type of companies almost never become the subject of M&A
transactions which are formulated through share transfers.

In light of the above, by closely observing the requirements of the articles of association and the
TCC, required closing actions, approvals or waivers, as the case may be, should be regulated
under the conditions precedent section of the share purchase agreement.

III. Limitations on Financing

Joint stock and limited liability companies are prohibited from acquiring their own shares (also
known as "share buybacks") or placing pledges thereon. Transactions in violation of this
prohibition are considered null and void pursuant to article 379 of the TCC. Main purposes of the
prohibition under the TCC are to preserve the company's share capital, to protect the interest of
the creditors, and to prevent unequal treatment among the company's shareholders. There are
certain exceptions to these prohibitions under the TCC. Further, companies are not allowed to
provide advance funding, loan or security to third persons who contemplate purchasing their
shares (the term "prohibition of financial assistance" is also used interchangeably) as per article
380 of the TCC.

A joint stock company is permitted to acquire or place pledge over its own shares if the total
amount of the shares offered for acquisition or as security does not exceed one tenth of the
company's share capital, or its issued capital. The board of directors of the joint stock company
should be authorized by the general assembly of shareholders to acquire or place pledge over the
joint stock company's own shares. The term of the authorization granted to the board of directors
cannot exceed five years, uninterrupted. As per the said general assembly resolution authorizing
the board of directors, the general assembly of shareholders shall also determine value of the
shares that can be acquired or accepted as pledge, together with the lower and upper limits of the
value of those shares.

In addition to the prerequisites explained above, worth of net assets of the company following
the deduction of the consideration paid for the acquired (or pledged) own shares' should at least
be equal to the sum of the share capital and reserve funds of the company, which anyway have to
be preserved in accordance with the TCC. Only the shares those are fully paid-in can be acquired
or accepted as security by the company.
Exceptions to the foregoing rules are regulated under article 382 of the TCC. According to the
said article, companies may acquire their own shares without being subject to the conditions and
restrictions set forth above if a share buyback is made (i) through share capital decrease, (ii) as a
result of global succession, (iii) in virtue of a legal obligation for acquisition, (iv) as a result of an
enforcement procedure initiated for collection of the company's receivables, provided that the
concerned shares are fully paid-in, or (v) if the company is engaged in trade of securities.

Even though the TCC allows share buybacks under certain conditions, companies are not entitled
to hold such shares perpetually. Acquired own shares must be disposed of as soon as possible,
and without causing any loss to the company and in any event, within three years following their
acquisition. In the event that own shares are acquired (or accepted as a pledge) in breach of the
principles indicated above, such shares must be disposed of (or the pledge should be released, as
the case may be) within a maximum period of six months commencing from the date of their
acquisition or acceptance as pledge. Unless shares are disposed of in either of the two ways
stated above, then the shares must be immediately redeemed by way of capital decrease.

Financial assistance, as prohibited, is defined as a transaction aiming at provision or grant of an

advance, loan or security, entered into by the company with a person who is contemplating to
acquire the shares in that company. Prohibition of financial assistance as introduced by TCC
under article 380 serves the same purpose with prohibiting the transactions such as advance
funding, loan or security to third parties by the company for the purchase of its shares, and
unlawful financial assistance shall be deemed null and void.

There are two exceptions to the prohibition of financial assistance. One of these exceptions is
related to transactions which are entered into by credit and financial institutions as a part of their
ordinary course of business, and the other exception is related to advance payment, loan or
security provision transactions through which own shares are acquired by the company for
employees of the company or those of its subsidiaries. However, if (i) transactions identified
above as exceptions have the effect of reducing the reserves of the company below levels, which
the company is required to preserve pursuant to applicable law, (ii) rules pertaining to
expenditure of legal reserves set out in article 519 of the TCC are violated, or (iii) rules ordering
the company to set aside a reserve fund to cover the costs of repurchasing of its own shares under
article 520 of the TCC are violated, such transactions shall again be deemed null and void.

Additionally, an arrangement between the company and a third party, which grants that third
party the right to acquire the company's own shares in the account of the company, company's
affiliates, or another company that the majority of its shares are held by the company, shall be
null and void, if the transaction constitutes a breach of article 379 of the TCC.

Therefore, in an M&A transaction that is structured as a share transfer the foregoing regulations
under the TCC should be observed, especially while structuring the financing of the transaction.

IV. Minority Rights

A "minority shareholder" is defined under article 411 of TCC as a shareholder holding shares in
a company that represent at least 10% (ten percent) of the share capital in joint stock companies
and 5% (five percent) in publicly held joint stock companies. Minority rights that may be of
relevance in an M&A transaction are summarized below:

 Right to Request A Special Auditor:

Pursuant to article 438 of the TCC, every shareholder (i.e. not only minority shareholders) has
the right to request from the general assembly of shareholders the conduct of an audit for
clarification of certain issues or transactions whenever needed, provided that the "right to obtain
information" has already been exercised by that shareholder. If such request is rejected by the
general assembly, then each minority shareholder, or shareholders whose total nominal value of
shares is at least TRL 1,000,000 (one million Turkish Liras) may request from the commercial
court of first instance that has jurisdiction over the registered address of the company,
appointment of a special auditor.

 Protective Rights against the "Dominant Shareholder" / "Controlling Company"

Pursuant to article 195 of the TCC a corporation is deemed to be in control of another

corporation, directly or indirectly, in case of (i) possession of majority of voting rights, (ii)
constituting majority in the board of directors, (iii) ability to use majority of voting rights based
on an agreement, alone with or other shareholders, or (iv) ability to manage the company on the
basis of an agreement or by other means. The first company is considered as the "controlling
company" and the other is the "controlled company". Pursuant to article 202 of the TCC, a
controlling company shall not exercise its control in a way that would make the controlled
company incur a loss. In particular, the controlling company cannot direct the controlled
company to carry out legal transactions such as transfer of business, assets, funds, staff,
receivables and debt, to decrease or transfer its profit, to encumber its assets with in-rem or
personal rights, to undertake liabilities such as providing surety, guarantee and bill of guarantee,
to make payments, to adopt decisions or take measures, which negatively affect its efficiency and
activity such as not renovating its facilities, limiting, suspending its investments without
reasonable grounds, to refrain from taking measures that will hinder its development. Such
actions might be allowed only if any loss incurred due to such acts or decisions is made good
within that financial year, or a right to claim the "equivalent value" is granted to the controlled
company no later than the end of that financial year, with a specific explanation of how and
when this loss will be recovered.

V. Conclusion

As explained in detail above, pre-closing and post-closing actions of an M&A transaction should
be determined considering that corporate governance issues may interrupt both the completion
and business continuity. Limitations on share transfers should be taken into account while
regulating the contractual undertakings of sellers, conditions precedent, completion actions
whereas restrictions on financing should be taken into account while structuring the funding of
the acquisition.
 BIBLIOGRAPHY

LOKMANHEKIM, T., YUKARUÇ, N. N. AND YAZDIC, E. C.

Corporate Governance Tips For Mergers & Acquisitions - Corporate/Commercial Law - Turkey
In-text: (Lokmanhekim, Yukaruç and Yazdıc, 2019)
Your Bibliography: Lokmanhekim, T., Yukaruç, N. and Yazdıc, E. (2019). Corporate Governance Tips For
Mergers & Acquisitions - Corporate/Commercial Law - Turkey. [online] Mondaq.com. Available at:
http://www.mondaq.com/turkey/x/358158/M+A+Private%20equity/Corporate+Governance+Tips+For
+Mergers+Acquisitions [Accessed 15 Apr. 2019].