This brief article aims to clarify the turkish conflict of laws rules for transnational mergers and acquisitions (“M&A”).
Relevant Codes
There are two main codes in Turkish law for the conflict of laws rules and corporate law: the Code on Private International Law and International Procedural Law No. 5718 (“Code No. 5718”), dated November 27, 2007, and
Turkish Commercial Code No. 6102 (“Code No. 6102”), dated January 13, 2011 Unfortunately, neither of them has
any specific provisions related to the applicable law for transnational M&A.
I will not mention substantial Turkish law rules for M&A due to the specific context of this article.
The Legal Issue
In most cases, beyond the economic issues that diverge non-Turkish companies from M&A activities with
Turkish companies, that legal drawback can create confusion in the minds of businesspeople who have an interest in
Turkish companies but are not sure whether their M&A transactions must comply with Turkish law. The global economy that Turkey has attempted to be part of for years requires legal and commercial certainty. On the other hand, Code No. 6102 is deficient in bringing specific legal solutions to transnational M&A, even its general statement of reasons did not consider the issue of transnational mobility of companies as a contemporary issue1. Yet, this particular statement did not prevent Turkish and non-Turkish companies from establishing M&A processes.
Capacity of the Parties under Turkish Law
Although there is no express provision in Turkish law regulating the applicable law to M&A, the conflict of laws rules in Code No. 5718 for the capacity of legal persons are deemed applicable to companies planning to establish M&A processes. According to para.4 of Art. 9 of Code No. 5718, the capacity to have rights and the capacity to act of legal entities or communities of persons or assets are subject to the law of their seat as specified in their statutes.
However, in cases where their real seat is located in Turkey, Turkish law may be applied. Para.5 completes this provision by stating that the legal capacity of the legal entities lacking statute and the communities of persons and assets lacking legal entities is subject to the law of their real seat.
As is clear, under the Turkish conflict of laws rules, the lex societatis governing the capacity of legal persons is the statutory seat, or the real seat thereof. Even if the lex societatis is the statutory seat, the courts can still apply Turkish law to the capacity of legal persons under the real seat theory. However, Code No. 6102 provides that companies incorporated in Turkey must have their statutory seat in Turkey. It is not possible for a company incorporated in Turkey to have its statutory seat in another country. Accordingly, both Turkish and nonTurkish companies must have the
capacity to conduct M&A under seat theory, as Code No. 5718 provides for.
Applicable Law to Non-Turkish Companies
Further, non-Turkish companies must also comply with the substantive laws of their lex societatis. It does not concern Turkish law whether the lex societatis is determined under the incorporation or seat theory. Thus, a non-Turkish must ensure the legality of the M&A under its lex societatis. The lex societatis of different parties must be applied separately, not in a cumulative manner to all of them.
However, M&A between companies incorporated in Turkey and non-Turkish companies, of which lex societatis is the state of incorporation, is also quite common. In that case, the substantive rules of that state of incorporation must be considered for the processes of M&A. Since Turkish law does not provide for any provision as to the nationality of legal
persons, it does not recognize the theory of incorporation. However, there is no doubt that transnational M&A between
Turkish and non-Turkish companies is legally possible only if relevant provisions of Turkish law and the lex societatis of nonTurkish companies are applied.
Applicable Law to Agreement Clauses Unrelated to M&A
The most important phase of M&A is the conclusion of an agreement between the parties, which requires special attention as regards the applicable law thereto.
Some agreement clauses unrelated to M&A (such as due diligence and confidentiality clauses) can be subjected
to the principle of party autonomy since those clauses are not part of the mandatory rules of corporate law7. Otherwise, the most closely connected law to the contract is regarded as the lex contractus under para.4 of Art. 24 of Code No. 5718. This law is accepted to be the law of the habitual residence (at the moment of the conclusion of the contract) of the debtor of the characteristic performance; the law of the workplace or (in the absence of a workplace) the law of the residence of the abovementioned debtor in case the contract is concluded as a result of commercial and professional activities; in case the debtor has multiple workplaces, the law of the workplace is the most tightly related to the contract. Nevertheless, considering the state of all affairs, if there is a law more tightly related to the contract, that particular law shall govern.
It is controversial among international private law scholars whether the debtor of the characteristic performance is
transferred or transferee company. This debate goes back to the roots of transnational M&A. I prefer to accept the
transferee company as the debtor of characteristic performance. Accordingly, the law of the residence of the transferee
company is principally lex contractus governing the clauses unrelated to M&A9.
Applicable Law to Agreement Clauses Related to M&A
The principle of party autonomy is not applicable to the agreement clauses as to M&A, given due account to the rights
and obligations of third parties. The most proper solution suggests that the lex societatis of companies must be cumulatively applied in terms of the validity, substantive law, or forms of transactions. This conclusion calls for scrutiny of the mandatory provisions of all applicable lex societatis and requires determining the most rigid legal rules to
cumulatively apply to the specific elements of M&A agreements.
Conclusion
Even though Turkish law does not have a specific provision for applicable law to M&A, that does not complicate the
necessary transactions of M&A for nonTurkish companies. They will probably be subject to their lex societatis while the
Turkish party will be subject to Turkish law. In that regard, since the practice of M&A so far created a degree of certainty,
the non-Turkish businesspeople should not feel uncertain as to their M&A operations in Turkey.
