1. The Concept of Demerger of a Company in General
Once established pursuant to Turkish Commercial Code ("TCC"), stock companies, at their own discretion, might undergo structural changes in order to enhance their competitiveness and strengthen financial status. In this regard, as one of the alternatives, companies might opt for demerger by virtue of separating their assets and liabilities partially or in full. The pertinent articles whereby demerger process is regulated under Turkish Law are TCC Article 159 to 179.
According to TCC, there are two possible ways of demerger, which are i)full demerger by which the company is split off into components for restructuring purposes and all the assets are sold, as a result of which the company no longer maintains its legal entity and treated as if being liquidated and ii)partial demerger whereby demerging company retains an equity at the new company which will purchase some assets of the demerging company, the process which is quite similar to spin off. The main difference worth to mention here is that, in full demerger also widely known as in split-up, the demerging company no longer exists and all the records for the company are removed from trade registry, while in spin-off, the company subject to demerger continues to carry out its activity and operate on their own .
Demerger process can be completed through transfer of assets to an already existing company or to a newly established company incorporated for the purpose of buying out assets of the demerging company. This distinction is important especially for ensuing transactions and paperwork required to consummate all the process for demerging.
2. Transactions Required for Completion of Demerger in Nutshell
I. Capital increase and/or decrease: TCC Article 162 heavily regulates the concept of capital reduction during implementation of demerger. In partial demerger, capital reduction is required to align the outlook of demerging company from financial point of view after capital loss due to transferring certain parts of its assets to a third party company. However, it is not clearly regulated under TCC, in what proportion and conditions shall the capital be reduced based on demerger, but in any event the capital shall be reduced at least to the level to avoid technical bankruptcy.
In case of split-up or full demerger, capital reduction will not be an issue in the sense that the demerging company shall cease to exist and be removed from the Trade Registry.
Requirement of capital increase due to demerger is regulated under Article 163 of the TCC. Accordingly, the transferee company of the assets in demerger process is obliged to increase its capital to a certain level to ensure the rights of the shareholders of the demerging parent company remains intact and unaffected. The capital increase must be conducted by registration and announcement at the Turkish Trade Registry, based on a resolution adopted at General Assembly of the Company, in accordance with the same procedure stipulated and applicable for amendment in Articles of Association.
If demerger takes place through incorporation of a newly established company, then the charter capital of the company shall at least be equal to assets transferred by demerging parent company. As a caveat; although the general incorporation rules for the companies must be strictly complied with, limitation set out for contribution of in kind capital does not apply for the purpose of demerger process.
II. Demerger Agreement and Demerger Plan: In accordance with TCC, if a parent company transfers certain parts of its assets to existing companies through demerger, a Demerger Agreement shall be executed by and between boards of the participating companies to demerger process. On the other hand, if a parent company is planning to transfer parts of its assets to a new company, then a Demerger Plan shall be drafted which shall, among others, include draft Articles of Association of the new company to be incorporated.
III. Demerger Report: It is prepared to provide information to the shareholders about the demerger process to ensure shareholders make informed decisions about the transaction. Participating companies might draft a joint report for their respective shareholders.
It is imperative to touch upon and explain in detail the ramifications of the demerger process on the receivables of the participating companies; to elaborate on whether the due amount left at the disposal of demerging parent company after asset transfer shall suffice to meet the debt owed to creditors.
IV. Right to Inspect: Each company participating in demerger process is obliged to submit the following documents to the review of their respective shareholders no later than two months prior to the General Assembly Meeting to be convened to adopt demerger process:
- Demerger Agreement and Demerger Plan
- Demerger Report
- Financial statements and annual reports covering the preceding three years, and interim balance sheets.
If all shareholders unanimously approve at the general assembly meeting, small-sized companies within the meaning of law, can dispense with the necessity of right to inspect. Each of the companies participating in demerger process is obliged to announce the right to inspect at Turkish Trade Registry Gazette, as well as their web pages.
V. Securing Creditor's Rights: The Law requires certain procedures to be implemented to avoid any harm to be incurred by creditors as a result of demerger. Accordingly, participating companies in the demerge process shall invite their creditors to notify their receivables and make a claim for security, through an announcement to be made at Turkish Trade Registry Gazette, three times at seven days intervals.
VI. The Status of Assets Excluded from Demerger: It is possible to make arrangements at the demerger agreement and demerger plan with regard to assets to be excluded from demerger and hence remain under disposal of the parent demerging company. In case failure to touch upon that issue in the said documents, then the provisions of the TCC shall apply.
VII. Responsibility of the Companies Participating in Demerger: Pursuant to Article 176 of the TCC, parties involved in the demerger process shall be jointly liable for the debts owed to the creditors in case the party expected to incur the debt and make the payment pursuant to demerger plan fails to honor its obligation in due course and becomes party in default. As a side note, personal liability of the shareholders of the parent demerging company for the debt shall drop due to statute of limitation after three years, starting from announcement at the trade gazette of demerger decision.
VIII. Protection of Employee: In demerger, unless objected by the employee, the labor contracts shall be transferred to the transferee company with all rights and debts arisen thereby up until the transfer day. If the employee objects, the labor contract is terminated at the end of the grace period stipulated at Turkish Labor Code; the transferee and the employee are both liable to fulfil their obligations until termination date.
In this context, the former employer and transferee will be severally liable for the employees' receivables which are already due before the demerger as well as further rights to be conferred up until the end of employment agreement in case the employee objects to the assignment of its labor contract to the transferee company.
3. Resolution on Demerger and Registration at Trade Registry
After securing the debts owed to the creditors, the managing bodies of participating companies to the merger process are expected to submit the Demerger Agreement and Plan to the General Assembly of the Shareholders of the Company. Approval vote of the qualified majority of the shareholders are required to adopt a resolution for demerger unless a specific majority for quorum present and decision making process is sought at Articles of Association of the participating companies.
When the demerger is approved at the general assembly of the shareholders, the board of directors of the company shall have the resolution registered at trade registry of Turkey. If the capital of the demerging parent company shall be reduced due to partial demerger or spin-off, the amendment to the Articles of Association in this regard shall be brought and registered as well.
In case of full demerger or split-up, the emerging parent company shall automatically cease to exist upon registration of demerger resolution at the trade registry and all the actives and passives at the balance sheet shall be assigned to the transferee company upon such registration without any further notice or transaction.
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.