Authors: Corporate Law Department, Attorney Mustafa Şahin

Introduction

Division is a restructuring transaction whereby all or part of the assets and liabilities of a capital company are transferred to another existing company or to a newly incorporated company. Under the Turkish Commercial Code No. 6102 (“TCC”), the provisions governing division are set out in Articles 159 to 179. Within the systematic framework of the Code, division is principally classified into two main forms: full division and partial division.

I. Types of Division

A. Full Division

Pursuant to Article 159/1(a) of the TCC, in a full division, the entire assets and liabilities of a company are divided into parts and transferred to one or more companies. The shareholders of the divided company acquire the shares and shareholder rights of the acquiring companies. As a result of a full division, the divided company ceases to exist without liquidation and is deregistered from the trade registry.

B. Partial Division

Pursuant to Article 159/1(b) of the TCC, in a partial division, one or more parts of a company’s assets and liabilities are transferred to one or more companies. In this case, the divided company preserves its legal personality. Within this framework, either the shareholders of the divided company acquire shares in the acquiring company, or the divided company itself acquires shares in the acquiring company in consideration of the transferred assets, thereby forming a subsidiary.

II. Types of Partial Division

A. Partial Division by Acquisition

In a partial division by acquisition, a portion of the assets and liabilities of the transferring company is transferred to one or more existing companies. The transferred assets and liabilities become part of the acquiring company’s estate.

B. Partial Division by New Incorporation

In a partial division by new incorporation, the transferred portion of assets and liabilities is transferred to a newly incorporated company established within the scope of the division transaction. Pursuant to Article 166 of the TCC, in this case, a division plan is prepared instead of a division agreement. The registration of the division and the registration of the incorporation of the new company are carried out simultaneously.

III. Division Documents

A. Division Agreement and Division Plan

The division transaction is carried out by means of a division agreement where the acquiring company already exists, or by means of a division plan where the acquiring company is to be newly incorporated (Article 166 of the TCC).

Pursuant to Article 167 of the TCC, the division agreement or division plan must, at a minimum, include the following:

• the trade names, registered offices and legal forms of the companies participating in the division;
• a clear allocation of the assets and liabilities subject to the division, together with an inventory thereof;
• the share exchange ratio and, if any, the balancing payment, as well as the principles governing shareholder rights;
• the rights granted to holders of usufruct shares, non-voting shares and other holders of special rights;
• the method of share exchange;
• the date as of which the shares will entitle their holders to participate in the balance-sheet profit;
• the date as of which the transactions of the transferring company shall be deemed to have been carried out for the account of the acquiring company;
• any special benefits granted to members of the management bodies, executives and auditors;
• a list of employment relationships transferred to the acquiring companies as a result of the division.

The assets and liabilities allocated under the division plan or division agreement pass to the acquiring company upon registration of the division.

B. Division Report

Pursuant to Article 169 of the TCC, the management bodies of the companies participating in the division are required to prepare a division report. The report shall explain, from both legal and economic perspectives, the purpose and consequences of the division, the division agreement or plan, the share exchange ratios, valuation principles, potential obligations arising for shareholders, and the effects of the division on employees and creditors.

In divisions by new incorporation, the articles of association of the new company are annexed to the division plan. In small and medium-sized enterprises, the preparation of a division report may be waived with the unanimous consent of all shareholders.

IV. Right of Inspection

Pursuant to Article 171 of the TCC, the companies participating in the division are obliged to make available to shareholders, prior to the general assembly resolution, the division agreement or plan, the division report, the financial statements and annual reports for the last three fiscal years, and any interim balance sheets, for inspection. In small and medium-sized enterprises, the right of inspection may be waived with the unanimous consent of all shareholders.

V. Protection of Creditors

Pursuant to Article 174 of the TCC, creditors of the companies participating in the division are invited to notify their claims and request security through announcements published in the Turkish Trade Registry Gazette (“TTRG”) and, in the case of capital companies, additionally on the company’s website. Creditors who submit a request within three months following the publication of the announcements are provided with security for their claims.

The obligation to provide security is eliminated if it can be proven that the division does not jeopardize the creditors’ claims.

VI. Liability Arising from Partial Division

In partial divisions, due to the preservation of the legal personality of the divided company and the transfer of only a specific portion of its assets and liabilities, questions arise as to which company remains liable for certain debts and under which circumstances claims may be directed against the other companies participating in the division. In this respect, the liability regime must be assessed separately with regard to unallocated debts, allocated debts, tax liabilities and employee receivables.

A. Unallocated Debts

Pursuant to Article 168/1(b) of the TCC, assets and liabilities that are not allocated under the division agreement or division plan remain with the transferring company in a partial division. Although the provision explicitly refers to assets, it is predominantly accepted in doctrine that this rule also applies to liabilities by analogy. Accordingly, debts that are not expressly allocated to the acquiring company during the partial division process remain with the divided company.

Article 168/2 of the TCC provides that the principles set forth in the first paragraph shall apply by analogy to receivables and intangible assets. Within this framework, receivables and intangible rights that are not allocated under the division plan or agreement likewise remain, as a rule, with the divided company. Adopting the same approach for liabilities is consistent with the systematic structure of partial division, as the primary criterion for determining the liability of the acquiring company is the explicit allocation made in the division documents.

In partial divisions carried out through the formation of a subsidiary, the divided company acquires shares in the acquiring company in consideration of the transferred assets. As a result, no decrease occurs in the equity of the divided company following the division. In this case, the transferred assets and liabilities are removed from the balance sheet of the divided company, while the shares acquired in the acquiring company are recorded as assets. However, this does not prevent the application of the general rule with respect to unallocated debts; the liability of the divided company continues for debts that have not been expressly allocated.

B. Allocated Debts

A special liability regime for allocated debts in partial divisions is set out in Article 176 of the TCC. Pursuant to this provision, the company to which a debt is allocated under the division agreement or plan is deemed to be primarily liable for that debt. If the allocated company fails to perform the obligation, the other companies participating in the division become secondarily and jointly liable, provided that the statutory conditions are met.

Pursuant to Article 176/2 of the TCC, secondary liability arises only if the claim has not been secured and one of the circumstances enumerated in the article occurs in respect of the allocated company. These circumstances include the bankruptcy of the debtor company, the granting of a concordat period, the emergence of the conditions required for the issuance of a definitive certificate of insolvency in enforcement proceedings, the relocation of the company’s registered office abroad rendering enforcement in Türkiye impossible, or the relocation of its foreign registered office making enforcement significantly more difficult.

Article 176 of the TCC does not provide for an explicit limitation period or time restriction for secondary liability. This has given rise to doctrinal debate. According to one view, the general limitation periods applicable to joint liability should apply by analogy. According to another view, in the absence of an explicit statutory limitation, secondary liability continues indefinitely for debts that arose prior to the division and were transferred to the acquiring company through the division. This debate is significant in striking a balance between the protection of creditors and the limitation of corporate liability in partial divisions.

C. Tax Liabilities

The consequences of partial division with respect to tax liabilities are specifically regulated under the Corporate Tax Law No. 5520 (“CTL”). Pursuant to Article 20/3 of the CTL, the companies acquiring the assets of the divided company are held jointly and severally liable, up to the fair market value of the assets acquired, for tax liabilities accrued or to be accrued by the divided company up to the date of division.

This provision also applies to partial divisions carried out under Article 19/3(b) of the CTL. Although such partial divisions may be treated as tax-neutral reorganizations under certain conditions, this does not eliminate the acquiring companies’ liability for public receivables. Joint and several liability for tax debts is limited to the fair market value of the acquired assets.

Considering the statute of limitations applicable to public receivables under tax law, the companies participating in the division may also become liable for tax assessments and penalties imposed after the division date. Therefore, tax liabilities require a separate and specific assessment within the liability regime of partial divisions.

D. Employee Receivables

The fate of employee receivables in partial divisions is regulated under Article 178 of the TCC. Pursuant to this provision, in both full and partial divisions, employment contracts are transferred to the acquiring company together with all rights and obligations, unless the employee objects. In the event of an objection, the employment contract terminates upon expiry of the statutory notice period.

Under Article 178 of the TCC, the transferring and acquiring employers are jointly and severally liable for employee receivables that became due prior to the division and for those that will become due until the date on which the employment contract would normally terminate. Where the contract terminates due to the employee’s objection, joint and several liability continues for receivables accruing until the termination date.

Employee receivables in partial divisions are also assessed within the framework of workplace transfer provisions under Article 6 of the Labor Law No. 4857. According to established case law, partial division is deemed to constitute a workplace transfer. Accordingly, the transferring and acquiring employers are jointly liable for employee receivables arising prior to the transfer and payable as of the transfer date, while the liability of the transferring employer is limited to two years from the date of transfer.

VII. Partial Universal Succession

Under the systematic framework of the TCC, upon registration of the division, the assets and liabilities allocated under the division plan or agreement pass to the acquiring company without the need for a separate dispositive transaction. This transfer is referred to in doctrine as partial universal succession. In partial universal succession, the transferring company retains its legal personality, while only the transferred portion of assets and liabilities passes to the acquiring company.

In partial divisions carried out through the formation of a subsidiary, the transfer is considered to be based on the contribution of assets in kind.

Conclusion

Under the TCC, full and partial divisions are regulated as restructuring mechanisms giving rise to distinct legal consequences. In partial divisions, division documents, the right of inspection, creditor and employee protection, and the liability regime collectively constitute the legal framework of the transaction. As a rule, the transfer of assets subject to division is based on the principle of partial universal succession; however, divisions carried out through the formation of a subsidiary exhibit a different legal character.