For a commercial enterprise to change hands it is not necessary to carry out a separate act of disposal in respect of each of the asset items within it; the enterprise may be transferred as a single whole and may also be made the subject of other legal transactions. The transfer is effected by a contract drawn up in written form.
Unless otherwise agreed, the scope of the contract is deemed to include fixed assets, goodwill, the tenancy right, the trade name and other intellectual property rights, and the elements permanently dedicated to the enterprise. The parties may exclude one or more of these items from the transfer. Transferring only the assets while leaving the liabilities outside the scope is not, however, permissible; a contract drawn up to that effect is invalid. At the final stage the transfer contract is registered with the trade registry and announced.
The concept of the commercial enterprise entered our law with the Turkish Commercial Code No. 6102 and constitutes a category distinct from the tradesman’s business; the boundary between the two is drawn by presidential decision. In this briefing note we address the questions of how an enterprise is to be transferred and on what conditions the transfer depends.
Transfer of the Enterprise’s Assets
The acquisition as a whole of a body of assets or of a commercial enterprise, together with its assets and liabilities, is regulated in Article 202 of the Turkish Code of Obligations No. 6098. Mergers effected by enterprises reciprocally acquiring each other’s assets and liabilities, or by one being absorbed into the other, are governed by the same provision. The provision allows a body of assets or of debts to be transferred as a whole without separate consent being obtained from the creditor.
What both provisions regulate is transfers of assets; personal elements fall outside the transfer. No change therefore occurs as regards the owners and the shareholders of the enterprise or company acquired or merged.
Transfer of Assets and Liabilities Together
The enterprise’s assets and liabilities must be transferred as a whole and in such a way that the continuity of the activity is preserved. Since the assets constitute the natural security for the enterprise’s debts, the transfer must necessarily include the liabilities as well. For this reason a transfer of the assets alone is not legally possible. It is not permissible, for example, for a company’s receivables to be transferred while its debts are left outside the scope.
Transfer of the Trade Name
The transferor may, if it wishes, keep the trade name outside the transfer. Where the transfer contract so permits, or where the contract contains no stipulation as to a non-competition obligation, the transferor may even continue to use its name in a new enterprise it establishes. Conversely, unless the contract provides otherwise, the trade name is deemed to have been transferred as well. For detailed information on the subject, see the note entitled “Registration of a Trade Mark, the Protection It Affords and Its Termination”.
Transfer of Goodwill
Goodwill is a value encompassing together the income expected to be generated in the future, the workforce, supplier relationships, shareholders and the network of relationships that has been built up. The value of the firm known in practice as “key money” may also be assessed within this scope.
Unless otherwise agreed, goodwill falls within the scope of the transfer. This value includes the customer base acquired and exceeds the sum of the individual values of the asset items. Since that value passes to the transferee with the transfer, the transferor must be regarded as being under an obligation not to compete with the transferee even where the parties have not additionally provided for a non-competition stipulation.
Transfer of the Tenancy Right
A commercial enterprise may operate in immovable property that does not belong to the merchant and is the subject of a lease relationship. In such a case the tenancy right must be transferred as well. This element differs from the others, however: for the tenancy right to pass together with the enterprise, the written consent of the owner is additionally required.
The matter is governed by Article 323 of the Turkish Code of Obligations, which regulates the transfer of the lease relationship and is mandatory in nature:
Turkish Code of Obligations No. 6098, Art. 323
“The tenant may not transfer the lease relationship to another without obtaining the written consent of the landlord. In leases of business premises, the landlord may not refuse such consent without just cause.”
Since 01.07.2020, the date on which Turkish Code of Obligations Art. 323(1) entered into force, a landlord may not refuse this consent in leases of business premises without showing just cause. Where, by contrast, the enterprise operates in premises owned by the merchant, there will be no tenancy right among the asset items and no such transfer can arise.
For detailed information on the subject, the note entitled “May a Tenant Transfer the Lease Agreement?” may be consulted.
The Transfer Procedure
The rules governing the procedure also constitute the conditions for the validity of the transfer. In this framework, the contract concluded for the purpose of the transfer is subject to written form and must be registered with the trade registry and announced.
The Written Form Requirement
The relevant provision is as follows:
Turkish Commercial Code No. 6102, Art. 11
“This transfer contract and other contracts having a commercial enterprise as a whole as their subject matter shall be made in writing and shall be registered with the trade registry and announced.”
Accordingly, transactions of this kind relating to a commercial enterprise must be made in written form, and that form is, under Turkish Code of Obligations Art. 12(2), a condition of validity.
The transfer contract to be drawn up in writing must further set out the following matters:
- The transfer price of the enterprise and the conditions on which payment is to be made.
- The parties’ names and surnames or trade names, and addresses suitable for service.
- An unconditional declaration that the enterprise is transferred as a whole and in such a way that its continuity is preserved.
- Which elements of the enterprise are excluded from the transfer.
Registration with the Trade Registry and Announcement
The transfer contract must be registered with the trade registry and announced. Registration here is constitutive in nature; no transfer can arise until registration has taken place. There is no need for separate acts of disposal to be carried out in respect of the elements falling within the scope, since the statute provides for the transfer of the enterprise as a whole.
The Position of Debts on Transfer
The passing of the liabilities to the transferee does not depend on the consent of the creditors. From the date on which notification and announcement are made, the transferee becomes liable to the creditors and to third parties without any further formality being required. That liability continues throughout the limitation period provided for each debt.
Because in a transfer of an enterprise the passing of the debt to the transferee arises not from the parties’ intention but directly from statute, the transferee is liable also for debts of whose existence it was unaware. Even where the parties have agreed among themselves which of them is to be liable for which debts, that agreement takes effect only in the internal relationship; it cannot be raised against the creditors.
The fact that the transfer has taken place does not relieve the transferor of the enterprise of the obligation to pay the debts.
The Consequences of the Transfer
Loss of Merchant Status
Where the transferor is not also the owner of another commercial enterprise, it loses the status of “merchant” as a result of the transfer.
Passing of the Elements Dedicated to the Enterprise
As a rule, all elements permanently allocated to the enterprise pass into the transferee’s assets upon the transfer.
Non-Competition Obligation
The non-competition obligation as between transferor and transferee remains in force for a period of two years.
Joint and Several Liability for Debts
For two years running from the date on which notification and announcement are made, the transferor and the transferee are jointly and severally liable for the enterprise’s debts. For detailed information on the subject, the note entitled “Default of the Debtor and the Creditor’s Rights” may be consulted.
Consequences of the Transfer under Employment Law
Employment contracts in force at the workplace, or at a part of the workplace, as at the date of transfer pass to the transferee together with all rights and obligations. The transferor’s liability arising from those contracts is limited to two years running from the moment of transfer. Neither the transferor nor the transferee employer may terminate an employment contract on the sole ground that the workplace or a part of it has been transferred; nor does that situation constitute just cause for termination on the employee’s part.
Termination of the Commercial Enterprise
The solution adopted by the Commercial Code on this point departs from the regime under the Code of Obligations. For this reason the case in which a company comes to an end by being acquired by another company and shares are allotted to the owners of the company that comes to an end is subject to the Commercial Code. The matter is regulated in Article 136 of the Commercial Code:
Turkish Commercial Code No. 6102, Art. 136
“Upon the merger, the acquiring company acquires the assets of the transferred company as a whole. Upon the merger, the transferred company comes to an end and is struck off the trade registry.”
Independent Legal’s Assessment
The problem most frequently encountered in practice in transfers of commercial enterprises is that the parties structure the transaction as though it were an asset sale. Yet, by virtue of the principle that the transfer must be of the whole, the liabilities cannot be left outside the scope; contracts drawn up to that effect meet with the sanction of invalidity. For the transferee, the critical point is that it will be held liable by operation of statute for debts that were never disclosed to it. Carrying out a comprehensive legal and financial review before the transaction is therefore decisive in making the burdens that will later emerge foreseeable.
Nor does completion of the transfer bring the transferor’s liability to an end. The two-year joint and several liability running from notification and announcement, and the two-year liability arising under employment law, continue to exist after the transaction.
When a transfer of an enterprise is being planned, it is appropriate to review the following headings:
- Listing the elements to be excluded from the transfer individually in the contract and in terms leaving no room for doubt
- Taking an inventory, by way of pre-transaction review, of the burden of debt the transferee may face
- Obtaining the owner’s written consent in advance where the activity is carried on in leased premises
- Determining expressly whether the trade name is to be transferred and what the scope of the non-competition obligation is
- Completing the registry formalities without delay, since registration is constitutive in nature
- Regulating separately as between the parties the passing of the employment contracts and the transferor employer’s two-year liability
Independent Legal provides advisory services across the whole process of commercial enterprise and company transfers, from the review stage through to structuring the contract and completing the registration formalities.