What to Consider in Merger and Acquisition Processes?

What Investors and Entrepreneurs Should Consider in Merger and Acquisition Processes?

In the context of a contract, the acquisition of two or more partnerships under a single partnership umbrella or a newly established partnership is defined as a merger, without liquidation. Mergers can occur in two different ways:

• “Merger by acquisition" is when one commercial company acquires another;

• “Merger by formation of a new entity" is when commercial companies come together under a new company.

Acquisition or sale, on the other hand, is briefly defined as the transfer of all or part of the shares or assets of a company for a certain price.

Merger and acquisition processes are complex and important steps for investors and entrepreneurs. Ensuring the company's growth and development, increasing market share, and enhancing efficiency can be considered as significant reasons for company mergers and acquisitions.

In this article, we will briefly discuss what investors and entrepreneurs should consider in merger and acquisition processes.

1. Conducting Due Diligence and Risk Assessment

It is inevitable for a company seeking investment to undergo a detailed examination by potential investors or buyers. During this examination process, a thorough analysis of the company's financial and legal situation is conducted, including its corporate documents, financial statements, assets, contracts, commercial records, and lawsuits. These documents are usually made available to potential investors or buyers for a limited period, either physically or virtually.

This assessment can be made not only from a legal, financial, and tax perspective but also in terms of technical aspects, and compliance with environmental legislation, considering the characteristics of the planned transaction. Especially in merger and acquisition processes, investors must have a comprehensive understanding of the company's situation and risks through an assessment conducted by experts in the field. This way, the investor can determine the acquisition price accurately.

2. Examination of Shareholders' Agreement

One of the important issues to consider before purchasing a certain percentage of shares in a company is whether there is an existing shareholders' agreement in the company whose shares are being purchased. This agreement generally regulates the management of the company, the rights, and responsibilities of shareholders, and aims to prevent potential disputes and protect confidentiality among shareholders. The shareholders' agreement may grant privileges to certain shareholders such as profit share, liquidation share, pre-emption, and voting rights, even if the majority of the company's shares have been transferred, control of the company may not pass to the purchaser. Therefore, the provisions of the shareholders' agreement can affect the acquisition process. If not carefully analyzed, these provisions such as privileges, rights of sale, and pre-emption rights, can hinder the completion of the process.

3. Inclusion of Non-competition and/or Non-solicitation in the Transfer Agreement

In merger and acquisition processes, the situation of key personnel and shareholders of the totally or partially acquired companies is crucial for the investor in terms of maintaining the continuity of the company's activities and not losing customers. The consideration of issues such as the possibility of the shareholders of the transferred company working again in the same or similar field of activity where the transferred company operates, the transfer of former customers or key personnel to the newly established company, throughout this entire process, and including them in the transfer agreement to be signed between the parties, will help prevent disputes in this regard in the future.

Similarly, depending on the nature of the planned transaction, the situation of employees, the existence of a collective labor agreement, and unionization in the workplace are also important issues that investors and entrepreneurs should consider.

4. Competition Authority Approval

The Law on Protection of Competition prohibits mergers and acquisitions that would significantly reduce competition. However, mergers and acquisitions that require approval from the Competition Board have been determined by the Competition Board. Accordingly, in a merger or acquisition transaction:

- If the aggregate Turkish turnover of the transaction parties exceeds TRY 750 million and the Turkish turnovers of at least two of the parties each exceed TRY 250 million, or,

- If the Turkish turnover of the transferred assets or business in acquisitions or the Turkish turnover of any of the parties in mergers exceeds TRY 250 million and the worldwide turnover of at least one of the transaction parties exceeds TRY 3 billion.

- The turnover threshold will not apply to transactions related to the purchase of technology companies operating within the Turkish market or engaged in research and development or service provision to Turkish users.

In case the thresholds mentioned above are exceeded, or in transactions concerning the acquisition of technology companies (subject to the conditions mentioned above), obtaining approval from the Competition Board will be necessary. Investors in merger and acquisition transactions should pay attention to these thresholds and complete the relevant applications before the transfer process is completed.

5. Notification/Approval to Official Authorities

In merger and acquisition processes, apart from competition authority, depending on the activities of the companies subject to merger and acquisition, investors and entrepreneurs need to obtain permission or make notifications to other official authorities such as the Capital Markets Board ("CMB"), the Central Bank of the Republic of Turkey ("CBRT"), the Ministry of Trade, the Banking Regulation and Supervision Agency ("BRSA"). For example, in terms of banking legislation, when banks are subject to merger, permission from the BRSA is required.

Similarly, whether the licenses held by the companies being transferred will pass to the acquiring company as a result of the merger process or whether the companies will reapply for licenses is also an important issue to be considered by investors and entrepreneurs. If the company loses the license required to operate as a result of the merger process, this aspect should also be considered before the transfer process.

Conclusion

In merger and acquisition processes, investors and entrepreneurs should pay attention not only to due diligence and risk assessments but also to factors such as non-compete agreements and obtaining approvals from regulatory authorities. Additionally, the pre-transfer practices of the company subject to transfer and potential future risks should be considered. Therefore, in the share purchase agreements or transfer agreements, representations and warranties can be obtained from the transferor. If there is a discrepancy with the given warranties, a compensation claim can be regulated, especially in risky areas (environmental legislation, lawsuits, etc.), and compensation that is not subject to a specific limit in the future can be requested.

Furthermore, for each business, separate market and competition analyses should be conducted, and attention should also be paid to issues such as the compatibility of employees and corporate cultures with each other.