Turkey: Invalidity Risk When Using A New SPV In An Asset Or Share Acquisition Deal

Last Updated: 20 October 2017
Article by Bilge Zeynep Yilmaz and Serkan İçtem

Parties of an asset or share purchase agreement are often not aware of an inherent legal risk when structuring an acquisition deal specifically in case where a newly established special purpose company is being used as a purchaser for the target assets or shares. This article will discuss a limitation under Article 356 of the Turkish Commercial Code (the "TCC") stipulating special requirements as and when an asset or share acquisition is made by such a newly-incorporated SPV and the adverse consequence of failure to comply with such requirements.

Acquisition Made by a Newly-Incorporated Purchaser

Acquisition or lease of an enterprise or asset may in some cases create a conflict of interest in between different shareholders or shareholders as a group and creditors of a company. A managing shareholder or director may direct the company to pay a consideration exceeding the fair market value for an acquired enterprise or asset (including shares) with the purpose of generating an indirect personal benefit out of such transaction.  Consider a case where a company acting as a buyer decides to purchase an asset from a subsidiary or other company which is owned by the same person who acts as the representative of the buyer signing off on the same deal. This case would show a clear red flag in terms of a potential conflict of interest between that of the company acting as buyer and those in charge of executing such transaction on behalf of the buyer. Therefore, TCC stipulates a control mechanism with a goal to provide a protective and transparent scheme for acquisition of an enterprise, or any asset including shares of another company. Arguably, this attempt is made in a rather unsubtle way as will be discussed below and forced upon a newly established company acting as purchaser which undermines its intended purpose.

Article 356 provides that an agreement regarding acquisition or lease of an enterprise or asset1 in return of a purchase price exceeding 10% of the buyer company's paid in capital and made within two years as of the registration of such company shall not be valid unless the agreement is first approved by the general assembly of shareholders and registered with the relevant trade registry office.  All transactions made prior to the approval and registration of such agreement, including payment for closing thereof, will be invalid. Since the legal consequence is "invalidity" which clearly is the worst-case scenario that contract parties would expect to face after they agree and close a deal, it is worth looking further into this rather scary article. 

If a share or asset deal is potentially priced for more than 10% of the buyer's capital and parties are using a newly established SPV buyer for the deal, they are dealing with Article 356's limitations and potential consequences.  Using a SPV for an acquisition may be preferable for target asset related risk limitation purposes on the buyer side and a SPV is usually established with minimum or a small capital thus it will be very likely that the deal price will exceed 10% of the buyer SPV's capital in many transactions. If these conditions are met, the law requires a special and specific blessing of the buyer's shareholders to the proposed deal. This may be easy to obtain if all shareholders are aware and approve the transaction but one also needs to take into account the adverse timing and pricing implications that Article 356 will create.

In case of an acquisition or lease deal triggering Article 356 conditions, the board of directors of the buyer will first need to request the commercial court of first instance to make a valuation of the enterprise, or asset to be acquired or leased. Once an official valuation is made, such acquisition or lease deal needs to be approved by shareholders of the buyer side during a formal shareholders meeting with the presence and affirmative vote of shareholders holding at least 75% of the company's capital. The acquisition or lease deal will become valid only after registration of such affirmative shareholder resolution. Parties to and the value of the transaction will need to be registered and announced at the trade registry.

What does this all mean in the context of an asset or share purchase deal? It means that if a deal is falling under Article 356 parties will need to;

  • Revisit the timing and scheduled action plan for the proposed closing as a court supervised valuation process and a formal shareholders meeting will need to be accomplished before closing;
  • Take into account that control over the pricing of the deal will be lost as the deal is now going to be priced at or around the value determined by the court supervised third party valuation and shareholder approval will be sought based on such official pricing;
  • Be aware of the fact that essential terms of the deal will become public as it will need to be registered in the trade registry gazette.

Naturally none of the above-mentioned aspects will be pleasantly viewed by the transaction parties.  As failure to comply with any of the above-mentioned requirements will lead to invalidity of the transaction, an exception thereof becomes very important.

Exception from the Onerous Statutory Requirements

We briefly discussed above the implications in case an asset or share purchase deal falls under Article 356.  The same article also provides for an exception which states that the requested procedure will not be applicable in case the purchased enterprise or asset; (i) is acquired through compulsory legal foreclosure and enforcement process or (ii) is considered to be within the buyer's "scope of business". That being the case determination of the buyer's scope of business and whether such acquisition falls within such business scope becomes the determining factor.

Of course it is not always easy to tell the actual scope of business of a company by merely looking at its charter documents.  Such charter documents are often drafted in a way to be as broad and comprehensive as possible. Therefore, it is important to determine the actual and day to day business of the company by reference to its activities and make a determination of the main and ordinary business scope of the company. The ordinary scope of business of a company refers to operations which such company conducts on a regular and actual basis.

The argument of taking the type of the asset being acquired in determining whether acquisition thereof falls within scope of business has been discussed by scholars, and suggested that the exception covers only acquisition of assets such as inventory, tangible assets, and receivables rather than fixed assets such as real estate, license, and trademark. However, the Supreme Court, in a relatively recent decision, accepted the acquisition of a flour factory by a flour manufacturing company as falling within the scope of business of the buyer and cleared the transaction. This suggests that the type of the asset to be acquired is relatively unimportant so long as what is acquired can be directly linked with the actual and ordinary scope of business.  A flour manufacturing company should be able to buy a flour manufacturing facility (real estate and equipment) since the acquisition is directly linked with its scope of business.  Although the Supreme Court decision does not necessarily state so, the flour manufacturing company should also be able to purchase a competitor company's shares active in the same business or if a share acquisition is not preferred, a valuable trademark of such competitor or merely its fixed asset and equipment without having to go through Article 356's formalities.  

In a share acquisition, on the other hand, it was argued by some that the buyer may not benefit from such exception unless it is a holding/investment company whose actual scope of business is to participate to other companies' capital. In this sense, unless a newly established SPV is structured as a holding/investment company, then any share acquisition deal may be subject to Article 356 without being able to benefit from the exception clause.  The key then is the way in which the articles of association of a purchaser SPV is drafted, whether the SPV can effectively said to be a holding/investment vehicle in case the transaction is that of a share deal or whether any direct relevance can be established in between the actual scope of business of the SPV and the asset to be acquired.  

In conclusion, interpreting such exception in a strict sense would lead to a non-pragmatic practice such as a newly established manufacturing company not being able to purchase a real estate to establish a plant, or any other share or asset to conduct its operations without having the value of such share or asset appraised by a court and obtaining approval of shareholders first.  Completion of such formalities in each transaction would inevitably subject the company's daily operations to an inconvenient and time-consuming process which would eventually cause delays and more importantly financial loss specifically in businesses where transactions have to be realized in a quick fashion.


1 Article 356 does not specify any class of asset for the purpose of this clause therefore it is used in the broadest extent and interpreted as to include company share as well. Therefore, a share acquisition deal is also subject to the same requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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