Every merger and acquisition transaction has a story. This story may not be as coincidental or innocent as the meeting of people. We lawyers have a great deal of work to do in order to deepen this meeting and enable the parties to get to know each other better.

Undoubtedly, it is one of our duties to carry out a detailed due diligence, to investigate and find out the points that our client is not aware of, does not see or is unable to see, or to encourage our client to investigate and finally to raise awareness about the other party in the eyes of our client.

In fulfilling this task, we use various instruments and develop working methods or approaches. Although our job cannot be considered as a commercial activity, one of the indicators that we are carrying out our duties successfully is our working methods or the approaches we apply, which can be sometimes described as products in the business world. The results we achieve by using such methods and approaches also determine how we perform our profession.

Upon receiving a request for the examination of a company, usually our first reflex is conducting a small due diligence for getting the involved parties better, which can be equivalent to a “Third Party Due Diligence”. Third Party Due Diligence is a method that we apply to overcome the meeting phase mentioned in the introduction in a smooth and seamless manner for both us lawyers and the parties.

Although our client does not ask us to carry out this due diligence as a preliminary examination, it undoubtedly shows the tendency of a cautious law firm to provide good service to its clients.

Indeed, the better a client knows the company they wish to marry, the longer and more profitable their marriage is likely to be.

In fact, for more than a decade, these “Third Party Due Diligence” principles, which are familiar to lawyers as well as to the know-your-client or know-your-customer sectors, have been recommended by the World Economic Forum as an example of good practice in the fight against bribery and corruption, and the cornerstones of the recommendation have been published in a guide (ww.eforum.org/docs/WEF_PACI_ConductingThirdPartyDueDiligence_Guidelines_2013.pdf)

Although this guide is a unique reference in terms of its subject matter and scope, the preliminary examinations carried out with the methods we have developed through our experience are vital in cases where time is limited. Especially in the recent period, as the international sanctions have started to be closely monitored, let us take a closer look at some of the preliminary examination topics that we have addressed for the situations in which we are assigned to serve our clients.

Regardless of whether we represent the buyer or seller, if one or more of the parties is a closed commercial company established under Turkish law and subject to the Turkish Commercial Code No. 6102, we may subject them to a preliminary examination, mainly from publicly available sources, as follows:

• To examine the trade registry gazettes through the official website of the Turkish Trade Registry Gazette by tracking the trade name of the parties: Although this examination is considered as a standard examination, it also requires that the trade name has been obtained correctly. Therefore, it is important to know the full trade name of the parties, whether we are conducting a merger and acquisition transaction or writing a contract. In this way, the trade registry gazettes of the relevant party and a lot of information can be accessed through these publicly available gazettes.

• Current address of the parties: Companies may refuse to disclose their current address and may do so for various reasons. For example, this is the case for insolvent companies which intend to avoid creditors. If the current address of the company has not been registered and announced or vice versa, Article 51 of the Turkish Civil Code, which defines the place of residence of legal entities, shall enlighten the determination of an unknown registered address of a legal entity. According to the aforementioned article, “The residence of a legal entity is the place where its operations are managed, unless otherwise stipulated in its founding document.” Therefore, attention should be paid to the contact address used by the party to the transaction which has not registered and announced its current address. Such contact address may be determined even by a simple e-mail correspondence. The fact that the relevant transaction party falsifies or hides this address leads us to question the insolvency status as one of the first issues upon the commencement of the transaction.

• To determine the capital structure to the closest extent possible to the reality: While this determination is up-to-date and realistic for a limited liability company established in accordance with Turkish law, it is not always possible to achieve this accuracy for a joint stock company. Since share transfers in joint stock companies are not subject to registration and announcement, only the information of the shareholders who have transferred a certain percentage of shares can be accessed. In this case, if possible, it may be considered to request a copy of the relevant party's share ledger or the list of attendees showing the shareholders who attended the last general assembly. Thus, it may be conceivable to prepare a table showing the latest shareholder structure of the company as closest possible.

• Bankruptcy/concordat status: During the meeting phase, especially if a confidentiality agreement has not yet been signed, we may not have the chance to examine the current financial statements of the parties. In this case, although it is not possible to determine the insolvency status, it can be determined whether the relevant party has applied for bankruptcy / concordat through the MERSIS infrastructure.

• Identification of board members and authorised signatories: Since it is possible to identify these persons through the MERSIS infrastructure for Turkish companies, the next research step can be taken depending on whether the members of the board of directors and authorised signatories are Turkish or foreign.

• Distribution of duties of the board of directors and termination period: This information can also be determined by obtaining it from the MERSIS infrastructure in a publicly available manner. 

• Whether the members of the board of directors or authorised signatories of the parties have shareholding or representation authority in other companies: Since it is necessary to know the Turkish identity number of the relevant person in order to investigate whether Turkish executives are managers or shareholders in other companies from the publicly available information of the chamber of commerce established on a provincial basis, accessing the target information by using such personal data shall, of course, require the explicit consent of the relevant person. If there is such explicit consent, it is possible to reach direct or indirect subsidiaries, which are defined as “related persons” within the scope of the Turkish tax legislation in force in our country. For foreigners, the situation is not different since it is mandatory to know the potential tax number.

• To determine their worldwide subsidiaries and affiliates in case any foreign legal entities are among the shareholders: Although it is more difficult to determine the structure of the affiliates and subsidiaries of the parties in closed companies, a lot of information may be accessed through the relevant party’s website. On the other hand, the subsidiaries and affiliates infrastructure and even the organisation charts of these companies are accessible through the websites of companies granting importance to the principle of transparency.

• Information Society Services: Even though it is possible to access the mandatory information announced on the website of companies which are obliged to establish a website pursuant to the Turkish Commercial Code within the scope of information society services, such information may not be up to date. Therefore, it may be essential to query such information from other sources.

• Findex Report: Although it is not the primary duty of us lawyers, it is possible to obtain a financial risk report showing their credit ratings, cheques in circulation, letters of guarantee and other financial status, if the parties to the transaction allow or agree to provide it upon request. Such a document will serve as a supporting document in terms of the financial competence of the party concerned and its ability to pay its debts.
• Sanctions: The recent developments in the world, complicate or prohibit relations with some countries and/or persons, although our country is not a party to these sanctions. For this reason, the sanctions announced by the US and the EU must be followed up to date and it must be investigated whether the persons or entities that are parties to the merger and acquisition transaction are subject to such sanctions. The most well-known method in this regard, the SDN (Specially Designated Nationals and Blocked Persons List) announced by the Office of Foreign Assets Control (OFAC) of the US Treasury Department, which has become reflexively used. Although it is optional to monitor the actuality of these lists with special software, it may be considered as a precautionary measure in terms of early detection of risks.

Undoubtedly, the preliminary examinations conducted by the lawyers are not binding on the parties concerned, nor can they constitute a reference unless the represented party requests it. In fact, it is a stage which must be kept confidential, whether it is carried out upon request or not. In general, the results of such preliminary examinations are not kept in the database of law offices even temporarily. It is only a precautionary measure taken as a result of the lawyer's professional experience and his/her competence in conducting preliminary examinations rapidly and at a high level, without a legal obligation.

It is undeniable that the preliminary examination provides the opportunity to save time, to prevent wasted labour and effort, and to prevent large financial losses that may occur later, both in the preliminary or early stages of merger acquisitions and in cases where the preliminary examination is carried out before the attorney services to be provided. Therefore, in our opinion, it is recommended that Third Party Due Diligence should not be limited to certain matters, its purpose and scope should be expanded, and the time plan should include this stage, whether it is a merger, acquisition or any other legal matter.

KESIKLI LAW FIRM