Limited Liability Company Merger Agreements And Agreement Samples

Companies, which are important subjects of commercial life, are subject to various legal transactions. Some of these transactions include the subjection of companies to a sale agreement, division, sale (transfer), and change of type or merger with each other. In this article, we will focus on mergers of limited liability companies.

Limited liability companies are regulated as a type of Capital Company in the Turkish Commercial Code. Limited liability companies are the most preferred companies by entrepreneurs due to the fact that they are companies where the capital element is at the forefront and the responsibilities of the partners are limited and they can be established with low capital. Due to the prevalence of limited liability companies, we frequently come across in practice that limited liability companies are subject to company mergers, which are also referred to as "company marriages". Limited liability companies may merge for various reasons such as increasing market share and competitiveness, reducing costs, and benefiting from tax advantages.

The merger of limited liability companies is regulated under Articles 134 et seq. of the Turkish Commercial Code. Pursuant to Article 136/3-4 of the Turkish Commercial Code, "A merger is realized through the acquisition of the shares of the transferee company by the shareholders of the transferee company in exchange for the assets of the transferred company, according to an exchange ratio. With the merger, the transferee company takes over the assets of the transferred company as a whole. Upon merger, the transferred company shall be dissolved and deleted from the trade registry."

Mergers can be realized in two different ways: "merger under a new company " and "merger by acquisition of another company or companies". In both cases, the company participating in the merger dissolves within the body of the acquirer and loses its legal personality and is deleted from the trade registry. This is because all liabilities and assets of this company are transferred to the transferee company. In this way, the shareholders of the dissolved company automatically acquire a shareholding interest in the merged company according to a calculated exchange ratio.

This situation, which is explained by the principles of dissolution without liquidation and universal succession in law, has a number of legal consequences. In order to turn these legal consequences in favor of the company and to prevent negative consequences from arising, care should be taken when drafting merger agreements and meticulous work should be carried out on the issues we explain in detail below.

Which Companies Can Limited Liability Companies Merge with?

According to the system adopted in Turkish Commercial Law, it is not possible for every company to merge with each other randomly. The rule is that the merging companies must be of the same type. Joint stock, limited liability and limited partnership companies can merge with each other since they are capital companies. These companies may also merge with cooperatives. In short, limited liability companies may merge with joint stock companies, limited liability companies, and limited partnership companies with shares and cooperatives as both transferor and transferee. Although limited liability companies may also merge with collective and limited partnership companies, which are private companies, provided that they are the transferee, such mergers are not encountered in practice. Generally, mergers between joint stock companies and limited liability companies are common.

Stages of Merger in Limited Liability Companies

It is possible to examine the process to be followed in limited company mergers in 4 separate stages;

• Planning and preparation of the merger,
• Drafting and signing the merger agreement,
• Approval of the merger agreement,
• Registration and announcement of the merger in the trade registry

• Merger Planning and Preparation Phase

Before the merger of a limited liability company with another limited liability company or a joint stock company, a series of researches should be conducted to identify the target company for the merger, a list of companies that are suitable for the purpose of the merger should be prepared and the number of companies should be reduced by elimination. Once the target company is identified, negotiations should be initiated and information about the company should be obtained. Due Diligence is the most important step in this phase, which involves analyzing the company to be merged from various perspectives such as legal, tax, financial, human resources, etc. and obtaining information about the general situation of the company. Legal due diligence is a process that requires mastery of various areas of law and meticulous work. Both legal and financial due diligence processes will provide the clearest picture of the company and will help the acquiring company to see the way forward. Legal due diligence is made possible by a team of competent lawyers in the fields of Corporate Law, Contracts Law, Labor Law, Administrative Law, Procedural Law and Economic Law. The due diligence activity, which is the product of a joint work to be carried out with the support of independent accountants, certified public accountants or independent audit institutions, is the key to a successful corporate marriage.

We would like to remind you that since the parties share very important data regarding their companies with each other during the preparation phase, the necessary precautions in terms of information security should be taken at this stage. In order to ensure the security of the information and documents shared by our clients with the other company or companies participating in the merger during the preparatory phase, we prepare confidentiality agreements and submit them for the approval of the parties.

• Drafting and signing the merger agreement

Since the law stipulates that merger agreements of limited liability companies must be in writing, the merger agreement must be in writing. The agreement must be signed by the managers or authorized representatives of the companies participating in the merger and approved by their general assemblies. Undoubtedly, the most important stage of the merger process is the preparation and signing of the agreement. This is because all the conditions and details of the merger, the responsibilities of the directors and shareholders, prohibitions and sanctions are specified in the agreement. Therefore, the more detailed and clear the merger agreement is, the more possible disputes are prevented.

• Approval of the merger agreement

The merger agreement must be approved by the general assembly in order for the merger of limited liability companies to be valid and to produce results. There is a clear provision on the majority of the general assembly to approve the merger. Accordingly, the merger agreement must be approved by the votes of three-fourths of all shareholders, provided that they hold shares representing at least three-fourths of the capital in limited liability companies.

• Registration and announcement of the merger

Company mergers become effective upon registration in the trade registry. At the time of registration, all assets and liabilities of the transferred company shall automatically transfer to the transferee company. The shareholders of the transferred company become shareholders of the transferee company. The registration must then be announced in the Trade Registry Gazette. The merger becomes valid with the registration of the merger in the trade registry. In order to be registered in the trade registry, the merger agreements must carry all the validity elements and all other necessary documents must be prepared as requested by the relevant trade registry directorate. Deficiencies at this stage may delay the registration process.

As summarized above, the merger process is a complicated process that requires detailed work and expertise in more than one field. For this reason, after the merger decision is taken, it is necessary to work with an expert team consisting of lawyers and certified public accountants or independent public accountants from the preparation phase. With our team that has gained experience by playing an active role in merger and acquisition processes, we provide professional legal support services throughout the entire process, starting from the preparation stage, including the preparation of the merger agreement and merger report, registration and announcement process. During the merger process, we work with our expert business partners not only in the legal but also in the financial field, and we work with the principle of holistic and one-stop service in company mergers. In this way, we enable safe, easy and fast service delivery. We also provide our clients with the support they need in matters such as announcements to be made in the post-merger phase, relations with creditors, tax declarations.

Which Elements Should be Included in the Limited Liability Company Merger Agreement?

The Turkish Commercial Code regulates the mandatory elements that must be included in limited liability company merger agreements. In addition to the mandatory elements, we have tried to provide a list of other elements that we pay attention to as a team while preparing merger agreements. Accordingly, the following elements must be included in a limited liability company merger agreement;

• Authorization letter (For mergers subject to the permission or approval of the Ministry or other official institutions
• Trade names, legal types, headquarters of the companies participating in the merger, in case of merger through new establishment, the type, trade name and headquarters of the new company, the date and number of the decisions of the directors or board of directors taken as basis for the merger transaction subject to the Agreement,
• Information on the current capital structure and shares,
• Issued capital of the transferee company and the transferor company, distribution of the issued capital among the shareholders, share amount, share ratio, title of the shareholder,
• Real and legal persons who indirectly own the capital,
• The purpose and results of the merger (the part where the objectives such as competitiveness, efficiency, increasing market share, rapid growth, positive impact on financial statements, reduction of operating expenses, combining market experiences are explained)
• Financial statements taken as a basis for merger by acquisition,
• Whether the privileges granted to the share certificates representing the capital will continue or not,
• The rights granted by the acquiring company to the holders of preference shares, non-voting shares and usufruct certificates,
• Form of exchange of company shares
• The date on which the transactions and actions of the transferred company shall be deemed to have been made for the account of the transferee company,
• Special benefits granted to management bodies and managing partners,
• Names of partners with unlimited liability when necessary,
• List of the transferred company's goods and rights registered in similar registries such as land registry, trademark, patent, ship registry, etc.,
• Proof that their claims are not doubtful,
• The date on which the shares acquired by the merger are entitled to the balance sheet profit of the transferee or newly established company and all the features related to this request,
• Capital increase,
• Issuance of new shares due to merger and issuance certificate,
• Merger ratio, change ratio and the amount of capital increase to be realized by the transferee in parallel with these, the number of shares to be allocated by the transferee company to the shareholders of the transferred company, the type and nominal value of the shares to be given to the transferred shareholders,
• Whether the shareholders of the transferred company will be given shares of the transferee company or whether they will be entitled to dividends,
• If amendments are to be made to the articles of association, the relevant regulations (in order to amend the articles of association, companies are required to take a decision duly and in the prescribed manner and have this decision registered and announced in the trade registry).
• The right to leave (within which period and how to exercise it should be regulated), leaving fund or equalization amount,
• Corporate tax return
• Liability for the debts of third parties,
• Provisions on registration and announcement
• Shareholding rights of the shareholders of the transferred company in the transferee company.

1. Merger Report

After the merger agreement is signed and before the approval of the general assembly, a merger report should be prepared and announced in order to inform the shareholders of the company. The said merger report should be prepared by the manager or the board of managers, which is the management body of the limited liability company (in practice, lawyers prepare the merger agreement and the merger report). According to Article 146 of the Turkish Commercial Code, the elements that must be included in the merger agreement of a limited liability company are as follows

• Purpose and consequences of the merger,
• Merger agreement,
• The rate of exchange of company shares and, if provided, the equalization fund; the shareholding rights granted to the shareholders of the transferred companies in the transferee company,
• If necessary, the amount of the leaving fund and the reasons for granting a leaving fund instead of company shares and partnership rights,
• Features of the valuation of shares in terms of determining the rate of change,
• The amount of the increase to be made by the transferee company, if necessary,
• If foreseen, information on the additional payment and other personal performance obligations and personal liabilities that will be imposed on the shareholders of the transferred company due to the merger,
• In mergers of different types of companies, the obligations of the shareholders due to the new type,
• The effects of the merger on the workers of the merged companies and, if possible, the content of a social plan,
• The effects of the merger on the creditors of the merging companies,
• If necessary, the approvals obtained from the relevant authorities are explained in legal and economic terms and justifications are stated.

In the case of merger through a new company, there is a requirement to include the agreement of the new company in the merger report. However, if approved by all shareholders, small and medium-sized companies may waive the preparation of the merger report.

Below are explanations on what should be considered when drafting merger agreements of limited liability companies. It should be noted immediately that since the articles of association, capital structure and shareholding rights of each company are different from each other, merger agreements should be prepared by taking into account the specific characteristics of the companies. It is possible that a contractual provision that is advantageous for one company may be disadvantageous for another. For this reason, we will only make general explanations in this context. All contractual provisions in our article, which we have tried to make more understandable with sample contractual provisions, have been written hypothetically according to the possibilities and to give an idea. In addition, not every contractual provision that should be included in a limited liability company merger agreement is included below. Since a merger agreement to be formed by quoting the provisions in question will be incomplete and carries the risk of causing very serious legal disputes and loss of rights, we strongly remind you that the agreements should be drafted by lawyers specialized in this field, specific to each company and its conditions.

LIMITED LIABILITY COMPANY MERGER AGREEMENT EXAMPLE

1. Parties

In this section, if there is a merger by acquisition, it should be stated which companies are the transferee and the transferor, together with their titles, headquarters, addresses, which trade registry they are registered in, registration numbers, tax identification numbers. Address information is also very important since it will be used for correspondence and notification between the parties.

2. Definition of Merger

This section includes explanations on how the companies that are parties to the agreement are merged, whether it is a merger by acquisition or a merger in the form of a new company.

3. Existing capital and shares

The existing capital structure and amount of the companies that are parties to the merger should be specified in the agreement. It is also necessary to include explanations regarding the capital structure and amount of the transferee company or the newly established company as of the last situation. If there is a joint stock company among the parties to the merger, the issued capital and authorized capital ceiling must also be written. Registered capital system is not applied in limited liability companies. It is necessary to regulate whether there is a need for a capital increase after the merger, and if so, the amount of the increase. Accordingly, the transferee company must duly amend its articles of association, increase its capital and register the same.

4. Movable, Immovable and Intellectual Property and Rights

We recommend that a list of all registered/unregistered movable, immovable or intangible assets of the merged companies be attached to the agreement. We remind you that the fair values of all commodities should be appraised by a Certified Public Accountant, Certified Public Accountant or auditor and this should be submitted to the trade registry at the registration stage.

5. The merger ratio, the exchange ratio of company shares, the equalization fund, and the shareholder rights granted to the shareholders of the transferring company in the acquiring company

When determining the exchange rates of the shares, an equalization payment may be envisaged, provided that it does not exceed one tenth of the actual value of the shares allocated to the shareholders of the transferred company.

6. Effect of the Merger on Creditors

7. Merger date

8. Failure to Perform Obligations

We recommend that the agreement include a provision on the sanctions to be imposed in case the parties fail to fulfill their obligations under the merger agreement and the liability for damages.

9. Liability for Debts

The issue of liability for debts is the most important issue in a limited liability company merger agreement together with the partnership rights. The most controversial issue between the parties to the agreement is the issue of liability for debts. Although it is regulated that all debts will be transferred to the transferee company or the newly established company in case of merger, this situation is not as simple as it is described. In the agreement, it is necessary to specify the exact and clear dates of who is responsible for the debts arising before and after the transfer, due or not yet due, disputed (disputed) debts, and time-barred debts. The duration of joint and several liabilities and the starting date of the liability should also be included. If there are partners with unlimited liability, it is also appropriate to include an exceptional provision regarding their situation. While drafting this provision, the regulations stipulated by the Turkish Commercial Code regarding the call to the creditors should also be taken into consideration. Since the most advantageous arrangement should be made in line with the specific needs of each company, we do not find it right to share a printed provision.

10. Liability for Tax Debts

In the merger agreement of a limited liability company, it is also necessary to regulate which party will submit the corporate tax return and who will pay the tax debts that have accrued and will accrue until the date of merger. The commitments and guarantees to be given in this regard should be included under this provision.

11. Leaving Right and Leaving Fund

In the merger agreement, the companies participating in the merger may grant the shareholders the right to choose between the acquisition of shares and partnership rights in the transferee company and a leaving fund corresponding to the real value of the company shares to be acquired. The companies participating in the merger may stipulate in the merger agreement that only the leaving fund shall be given.

12. Future of Concessions

If there are privileges granted to partnership shares in the transferred company, it should be stated whether these privileges will continue or not.

13. Registration Procedures

The date of registration and announcement of the merger and which party is responsible for this matter may be regulated in the agreement.

14. Law and Provisions Applicable to the Contract

If there is a foreign element in the parties to the contract, a determination may be made as to which country's law will be applied in the application and interpretation of the contract.

15. Contract Copies and Enforceability

16. Signatures

Since the merger agreement is subject to the written validity condition, the parties must sign the agreement. The agreement must be signed by the manager or the board of directors.

Conclusion and Recommendations

In general terms, summary explanations about the limited liability company merger process have been provided above. Although there are suggestions on what should be considered when drafting merger agreements, we have deliberately avoided sharing a template agreement. This is because limited liability company merger agreements are extremely important legal texts that should be drafted by taking into consideration many factors such as the unique capital and shareholding structure of the merging companies, their assets, the sector in which they operate, the purpose of the merger and the expected benefit of the merger. A merger agreement drafted at a simple level, neglecting the necessary details, causes many disputes between the parties. For a valid and smooth merger, it is recommended to seek professional legal support not only at the contract stage, but also at the pre-contractual due diligence activities, preparation of the merger report, general assembly and board of director's resolutions, planning, registration and stages.

Please ask for further information from Solmaz Law and Consultancy team for your legal questions and problems regarding limited liability company merger processes.

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.