Authors: M&A Department, Prof. Dr. Ali Paslı, Atty. Mustafa Şahin
INTRODUCTİON
In today’s global business environment, mergers, acquisitions, and investment transactions are shaped not only by the parties’ mutual agreement but also by a comprehensive review process. One of the most prominent concepts at this stage is due diligence.
Although not explicitly regulated under the Turkish Commercial Code, due diligence has become an essential mechanism in nearly every share transfer or investment process. The main reason lies in balancing the information asymmetry between the parties. While the seller is fully aware of the company’s risks and internal details, the buyer often relies only on publicly available information or the disclosures provided by the seller. Eliminating this imbalance enables accurate pricing and secures informed investment decisions.
A. Eliminating Information Asymmetry
One of the greatest challenges in any transaction is the information gap between buyer and seller. A company’s financial statements, debt ratios, pending lawsuits, or tax liabilities are not always transparent to an outsider. In such cases, the investor risks making decisions without fully grasping the potential exposure.
This is precisely where due diligence comes into play. It reveals the true position of the target company, its strengths, and potential risks. Beyond shaping the purchase price, due diligence also guides the negotiation of contractual terms. Sometimes the process allows the buyer to proceed confidently; other times, identified risks may even halt the transaction altogether.
B. Areas of Examination: Scope and Dimensions
The scope of a due diligence review varies depending on the size of the deal and the industry in question. Broadly, it covers the following areas:
• Legal Review: Corporate documents, trade registry filings, contracts, ongoing or pending litigation.
• Financial Review: Balance sheet, income statements, receivables and liabilities, cash flow.
• Tax Review: Unpaid taxes, penalties, risks stemming from previous fiscal years.
• Commercial and Operational Review: Customer portfolio, supplier relationships, market position.
• Sector-Specific Review: Compliance with licenses, permits, and regulatory approvals in regulated sectors.
For instance, intellectual property protection is paramount in the tech sector, while zoning and land registry matters are critical in real estate or construction. Thus, every due diligence exercise is tailored to the risk areas inherent in the sector.
C. Impact on the Seller’s Liability
Due diligence has direct consequences for the seller as well. Pursuant to Article 222 of the Turkish Code of Obligations (“TCO”), the seller cannot be held liable for defects known or that should have been known to the buyer. Accordingly, the more extensive the due diligence, the narrower the seller’s potential liability in future disputes.
However, risks deliberately concealed by the seller are addressed through contractual warranty and indemnity provisions. As such, due diligence reports often serve not only as an investigative document but also as the foundation for the warranties and indemnification clauses within the Share Purchase Agreement (“SPA”).
D. The Process in Practice
Due diligence is typically carried out in several stages:
1. Initiation: Signing of a non-disclosure agreement (NDA) and letter of intent (LoI).
2. Data Room: Seller provides access to relevant documents, often through electronic data rooms.
3. Review: Legal, financial, and tax experts analyze the materials to identify risks and opportunities.
4. Reporting: Findings are compiled in formats such as detailed reports, “red flag” reports, or executive summaries.
5. Negotiation: Based on the identified risks, parties revisit the purchase price, closing conditions, and warranty provisions.
In recent years, vendor due diligence—reviews commissioned by the seller before initiating a transaction—has gained traction. This allows sellers to identify their weaknesses in advance and address them, making negotiations more predictable and smoother.
E. Strategic Implications
Due diligence is not merely a technical verification; it is also a strategic tool.
• For Investors:
o Ability to assess risks in advance and adjust valuation.
o Make an informed decision whether to proceed.
o Secure closing conditions and contractual protections.
• For Sellers:
o Highlight the company’s strengths.
o Build investor confidence.
o Limit future indemnification risks.
Thus, due diligence enhances both negotiation power and transactional security for all parties involved.
F. What It Means for Investors
From the investor’s perspective, due diligence may sometimes seem like an additional cost. However, it is, in reality, the most crucial safeguard of the investment itself. A seemingly minor lawsuit, a tax penalty from previous years, or a questionable contract could jeopardize millions in capital.
Due diligence not only uncovers risks but also reveals opportunities. For example, a thorough review of financial statements may show that the company is undervalued, or that unexplored market segments present untapped growth potential.
In short, due diligence answers not only the question “What are the risks?” but also “Where are the hidden values?”
Conclusion
While not explicitly codified under Turkish law, due diligence has become an inseparable part of corporate transactions and investment deals in practice. It empowers investors to see risks, price transactions accurately, and make secure investment decisions, while also enabling sellers to manage their liability effectively.
Today, for both domestic and foreign investors, due diligence is no longer a choice—it is a necessity. This necessity ensures not only legal security but also the long-term success of the investment itself.
