Demerger of a Turkish Company: Full and Partial Division, the Demerger Agreement or Plan, Creditor Security, the Partners' Vote and Registration (TCC 159-179)

A group with two distinct businesses inside one Turkish company, a joint venture whose partners want to go separate ways, an investor who wants to buy only one division: in each case the question is how to separate assets and liabilities without selling them item by item. The Turkish Commercial CodeTTKTurkish Commercial Code No. 6102The statute that governs merchants, companies, commercial paper, insurance and carriage — the framework a foreign business actually operates inside.Glossary → (TCC, Law No. 6102) offers a dedicated tool for this, the demerger (bölünme). Through a demerger, parts of a company's assets and liabilities pass as a whole to one or more other companies, and the partners or the company itself receive shares in return. This guide explains the two forms of demerger the Code recognises (full and partial), which companies can use them, the documents the management must prepare, the two-month inspection period, the protection of creditors and the order in which the steps must be taken, the majorities required, what happens to employment contracts, the moment the demerger takes effect, and the court actions open to partners and the liability of those involved. It is written for foreign shareholders and managers of Turkish companies and their advisers.

1. What a Demerger Is: Full and Partial Division

Demergers belong to the three restructuring tools that the Commercial Code regulates together with mergers and changes of legal form: TCC 134 to 194 apply to all three (TCC 134(1)), and the provisions of other laws are reserved insofar as they do not contradict TCC 135 to 194 (TCC 134(2)). The Code distinguishes two forms in TCC 159(1).

Full demerger (tam bölünme)

In a full demerger the company's entire assets are divided into parts and transferred to other companies. The partners of the dividing company acquire the shares and rights of the receiving companies. The company that has been fully divided and transferred comes to an end and its trade name is deleted from the trade registry (TCC 159(1)(a)). The company is dissolved by registration of the demerger, and on registration all of its assets and liabilities shown in the inventory pass to the receiving companies (TCC 179(3)-(4)).

Partial demerger (kısmi bölünme)

In a partial demerger one or more parts of the company's assets are transferred to other companies and the dividing company continues to exist. TCC 159(1)(b) allows two variants: either the partners of the dividing company acquire the shares and rights of the receiving companies, or the dividing company itself receives the shares of the receiving companies in exchange for the transferred parts and thereby creates its subsidiary (yavru şirket). The second variant is a way to move a business line into a subsidiary without a sale.

Transfer to an existing or a new company

The receiving company may already exist or may be founded in the course of the demerger. The difference determines the name of the core document: with existing companies the management bodies conclude a demerger agreement; for new companies the management body of the dividing company draws up a demerger plan (TCC 166(1)-(2)). Where a new company is founded, the formation rules of its type apply, but in capital companies the rules on the minimum number of founders and on contributions in kind do not (TCC 164).

2. Which Companies Can Be Divided and How Shareholdings Are Protected

The Code limits demergers by company type: capital companies and cooperatives can be divided into capital companies and cooperatives (TCC 160(1)). In Turkish law the capital companies are the joint stock company, the limited company and the partnership limited by shares. A general or limited partnership (a partnership of persons) is not in that list and therefore cannot use the demerger procedure.

Continuity of shareholdings

In both full and partial demergers the partners' shares and rights are protected under TCC 140 (TCC 161(1)). Under TCC 140 the partners are entitled to shares and rights of a value equal to what they held; when the exchange ratio is set, a cash compensation payment (denkleştirme) may be made, provided it does not exceed one tenth of the real value of the shares allotted.

Proportional and non-proportional demergers

TCC 161(2) distinguishes two allocation methods. If the partners of the dividing company receive shares in all receiving companies in proportion to their existing holdings, the demerger is proportional (oranların korunduğu bölünme). If they receive shares in some or all of the companies in different proportions, it is non-proportional (oranların korunmadığı bölünme). The non-proportional form is the one that allows two partner groups to separate, each taking its own business, and the Code sets a much higher majority for it (section 5).

Capital rules

If the dividing company reduces its capital because of the demerger, the general provisions on capital reduction in TCC 473, 474 and 592 do not apply (TCC 162). The receiving company increases its capital by the amount needed to protect the rights of the dividing company's partners; the rules on contributions in kind do not apply, and in the registered capital system the capital may be increased even if the ceiling is not sufficient, without amending the ceiling (TCC 163).

3. The Documents: Agreement or Plan, Report and Interim Balance Sheet

The demerger agreement or plan must be in writing and must be approved by the general assembly under TCC 173 (TCC 166(3)). TCC 167 lists what it must contain in particular:

• the trade names, seats and types of the companies involved;
• the division of the assets and liabilities into parts and their allocation, together with a list that shows immovable property, negotiable instruments and intangible assets one by one;
• the exchange ratio and any compensation payment, and the rights granted to holders of dividend-right certificates, non-voting shares and special rights;
• the manner of the exchange of shares, the date from which the new shares carry a right to profit, and the date from which the dividing company's transactions are treated as made for the account of the receiving company;
• special benefits granted to members of the management bodies, managers, persons with management rights and auditors;
• the list of employment relationships passing to the receiving company.

Assets and liabilities left unallocated

A demerger agreement may overlook an asset. TCC 168 gives the answer: in a full demerger an asset not allocated becomes the co-ownership of the receiving companies in proportion to the net assets allocated to them; in a partial demerger it stays with the dividing company (TCC 168(1)); the same applies to receivables and intangible rights (TCC 168(2)). In a full demerger, the companies involved are jointly and severally liable for debts not allocated to any company (TCC 168(3)).

The demerger report

The management bodies prepare a separate or joint written demerger report (TCC 169(1)). It explains the purpose and consequences of the demerger, the agreement or plan, the exchange ratio and compensation, valuation features, any additional payment or personal obligations, the obligations arising from a difference in company type, the effects on employees and any social plan, and the effects on creditors (TCC 169(2)). Small and medium-sized companies may dispense with the report only with the approval of all partners (TCC 169(4)).

Interim balance sheet

If more than six months have passed between the balance sheet date and the signing of the agreement or the drawing up of the plan, or if there has been a significant change in the assets, an interim balance sheet must be prepared; a physical inventory is not required (TCC 165).

No audit requirement

TCC 170, which once provided for an audit of the demerger documents, was repealed in 2012. The current Code therefore does not require an auditor to examine the agreement, the plan or the report.

4. The Two-Month Inspection Right and Changes in the Assets

Each company involved must make the following available for its partners' inspection at its head office two months before the general assembly resolution (TCC 171(1)): the demerger agreement or plan, the demerger report, the financial statements and annual reports of the last three years and any interim balance sheets. In a listed joint stock company the documents are also made available at the places the Capital Markets BoardSPKThe Capital Markets Board — and the Capital Markets Law No. 6362In Turkish the same three letters are used for the regulator (Sermaye Piyasası Kurulu) and for the statute it administers (Sermaye Piyasası Kanunu No. 6362).Glossary → considers appropriate.

Partners may ask for copies, and no fee or expense may be charged for them (TCC 171(3)). The companies must announce the inspection right in the Turkish Trade Registry Gazette, and capital companies must also publish the announcement on their websites (TCC 171(4)). Small and medium-sized companies may waive the inspection right only with the approval of all partners (TCC 171(2)).

Significant changes before the vote

If a significant change occurs in the assets of a company between the signing of the agreement and the general assembly, TCC 150 applies by analogy (TCC 172): the management body informs its general assembly and the other companies in writing, and they examine whether the agreement needs to be amended or abandoned.

5. Creditor Protection, the Order of Steps and the Majorities

A demerger moves debts away from the company that incurred them, so the Code protects creditors before the partners vote. The sequence matters.

1. Call to creditors. Creditors are invited by announcements in the Turkish Trade Registry Gazette, published three times at seven-day intervals (and, for capital companies, on the website), to declare their claims and request security (TCC 174).
2. Security within three months. The claims of creditors who make a request within three months of the publication of the announcements are secured (TCC 175(1)). The duty falls away if the company proves that the demerger does not endanger the claim (TCC 175(2)); if other creditors will not suffer harm, the company may pay the debt instead of providing security (TCC 175(3)).
3. Only then the vote. The management bodies submit the agreement or plan to the general assembly after the security under TCC 175 has been provided (TCC 173(1)).

Majorities

The approval resolution is taken with the quorums in TCC 151(1), (3), (4) and (6) (TCC 173(2)). For a joint stock company this means three quarters of the votes present at the general assembly, provided the holders represent the majority of the capital; for a limited company, three quarters of all partners holding at least three quarters of the capital (TCC 151(1)(a), (c)). If the field of business changes, the majority for amending the articles of association is also required (TCC 151(6)). For a non-proportional demerger the threshold rises sharply: the resolution in the dividing company needs at least ninety per cent of the partners holding voting rights (TCC 173(3)).

Secondary liability of the other companies

Security is not the creditors' only protection. If the company to which a debt was allocated (the company primarily liable) does not pay, the other companies involved are secondarily and jointly and severally liable (TCC 176(1)). They can be pursued only if the claim was not secured and the primarily liable company has gone bankrupt, obtained a concordat moratorium, met the conditions for a final certificate of insolvency, moved its seat abroad and can no longer be pursued in Turkey, or changed its foreign seat in a way that makes pursuit significantly harder (TCC 176(2)). Partners who were personally liable for the dividing company's debts remain liable for debts arising, or whose cause arose, before the announcement; these claims are time-barred after three years from the announcement, or from maturity if later (TCC 177, referring to TCC 158).

6. Employees, Registration and the Effect of the Demerger

Employment relationships listed in the agreement or plan pass to the receiving company. Under TCC 178(1), employment contracts pass to the receiving company with all rights and obligations as at the transfer date unless the employee objects. If the employee objects, the contract ends at the end of the statutory notice period (TCC 178(2)). The former employer and the receiving company are jointly and severally liable for the employee's claims under the employment contract that fell due before the demerger and those falling due up to the date on which the contract would normally end or ends because of the employee's objection (TCC 178(3)), and employees may request security (TCC 178(5)).

Registration

Once the demerger is approved, the management body applies for registration (TCC 179(1)); where the dividing company's capital must be reduced because of a partial demerger, the amendment to its articles is registered as well (TCC 179(2)). Two rules mark the decisive moment:

• The demerger becomes valid on registration in the trade registry, and at that moment all the assets and liabilities shown in the inventory pass to the receiving companies (TCC 179(4)).
• In a full demerger the dividing company is dissolved by registration (TCC 179(3)).

The transfer by registration is what distinguishes a demerger from a sale of assets: the parts pass as a whole without separate transfer acts for each asset.

7. Partners' Court Actions and Liability

Two court actions are open to partners, and both are subject to short time limits.

Action for a compensation payment (TCC 191)

If the shares or rights were not properly protected, or the exit compensation was not set appropriately, each partner may ask the commercial court of first instanceAsliye ticaret mahkemesiCommercial court of first instanceThe specialised first-instance court that hears commercial cases — and, unless the law says otherwise, it hears them whatever the amount in dispute.Glossary → at the seat of one of the companies involved to determine an appropriate compensation payment, within two months of the announcement of the resolution in the Trade Registry Gazette (TCC 191(1)). The one-tenth limit of TCC 140(2) does not apply to this payment; the judgment has effect for all partners in the same position; the costs are borne by the receiving company, although the court may impose them in whole or in part on the claimant; and the action does not affect the validity of the demerger.

Annulment action (TCC 192)

If TCC 134 to 190 have been breached, partners who did not vote in favour and had this recorded in the minutes may bring an annulment action within two months of the announcement, or of registration where no announcement is required (TCC 192). The court gives the parties time to remedy the defect and annuls the resolution only if it is not remedied.

Liability of those involved

All persons who took part in any way in a demerger are liable to the companies, the partners and the creditors for the damage they cause through their fault (TCC 193(1)); the general liability provisions in TCC 202-208, 555, 557 and 560 are reserved (TCC 193(3)). In the rules on groups of companies, TCC 202(4) adds that the other rights granted to shareholders in mergers, demergers and changes of legal form are reserved.

8. Full and Partial Demerger Compared

Before choosing between the two forms, the partners should map which assets, contracts and employees belong to each business, because the agreement or plan must list immovables, negotiable instruments, intangible assets and the employment relationships one by one (TCC 167). If the transaction is intended to separate partner groups, the ninety per cent threshold for a non-proportional demerger (TCC 173(3)) is the first question to test.

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