Regulations concerning the liability of the seller arising from defects under sales contracts, and the effects of defects on sale contracts, are stipulated in detail under Turkish Code of Obligations No. 6098 ("TCO"). However, there is no specific regulation regarding purchase agreements concerning shares that are substantially subject to Turkish Commercial Code No. 6102 ("TCC").
Although shares constitute the fundamental subject of share purchase agreements1, commonly, the purpose of the purchaser through share purchase agreements is the acquisition of enterprises of the company to which the subject shares belong. In this regard, in addition to the qualifications related to the shares, the qualifications that would substantially affect the activities of the company are crucial to the purchaser.
In this article, the results of the breach of representations and warranties concerning the target company which the shares that are subject to a share purchase agreement belong to, and the responsibility of the seller arising from such breach will be evaluated.
Liability concerning Representations and Warranties under Sale Agreements
Pursuant to Article 219 of the TCO, "The seller is liable for the lack of the qualifications notified to the purchase in any manner, and is also liable for the material, legal, or economic defects incompatible to the qualifications or quantity affecting the qualifications, and reducing or disposing of the benefit which the purchaser has anticipated for its intended use."
Accordingly, the liability of warranty under sale agreements appears statutory or contractually. The statutory warranty is the liability arising from the absence of the qualifications that are, under usual circumstances, expected to exist in the product, which are subject to the sale agreement, and the defects that decrease its value2.
Contractual warranty, on the other hand, is the liability arising from the lack of qualifications of the sale product that the seller has so notified.
In the event that the seller is liable for defects, the purchaser has the following optional rights:
- To revoke the agreement through a notification, including its intention to return the subject of the sale,
- Discount on the price,
- In the event that it does not require excessive expense, repair of the sale subject, or
- If possible, replacement of the sale subject with a non-defective equivalent of it.
Liability concerning Representations and Warranties under Share Purchase Agreements
Shares constitute the fundamental subject of share purchase agreements. Therefore, in principal, the main obligation of the seller arises from defects concerning the shares. Due to the lack of specific provisions on representations and warranties under the share purchase agreements, the said obligation is subject to general provisions. Accordingly, the seller primarily represents that the shares are duly issued by the target company, if applicable, the share certificates are duly issued, and other similar matters directly concerning the shares.
However, as explained above, as purchasers' aim with share purchase agreements is usually the acquisition of enterprises of the company to which the shares belong, the qualifications concerning the company and its activities also have crucial importance for the purchaser. Therefore, share purchase agreements contain an extensive scope of representations and warranties of the seller. The scope of these representations and warranties varies depending on the parties' interests and the agreement reached3.
Accordingly, representations and warranties stipulating certain qualifications of the target company, such as the target company, are duly established, it holds the necessary permits and licenses to carry out its activities, it has the right to use the assets necessary to maintain its activities in accordance with the legislation, and it conducts its activities in accordance with the legislation, and are included in the share purchase agreements.
In the event that the representations and warranties stipulated under the agreement concern the target companies' qualifications, not the shares (due to the fact that shares constitute the fundamental subject of the share purchase agreements), the matter as to whether these might be deemed as specific qualifications ("representations and warranties") under Article 219/1 of the TCO, is controversial4.
Within this context, Tekinalp opines that in the event that the majority of the shares of the target company are transferred, the seller is liable for the material and legal defects, and the insufficiencies of the assets5.
Buz assumes that share sale, in principal, is the sale of a right, not for goods, and only in the event that all, or nearly all, of the shares of a company are sold, such sale may be associated with a transfer of an enterprise. Buz stipulates that in such a case, defects of such enterprise shall be deemed as the defects pertaining to the shares, and the seller would be liable for such defects6.
Ayoğlu, on the other hand, expresses that the representations and warranties in relation to the target company cannot be deemed to be specific qualifications notified by the seller in terms of Article 219/1 of the TCO7.
It is notable that as the legislation does not stipulate a differentiation based on whether certificates that represent sale shares are issued, such matter would not affect the evaluations in this respect8.
The difference of opinion in the doctrine concerning the results of representations and warranties under share purchase agreements should be taken into consideration through the drafting of provisions regarding the results of the representations and warranties. Therefore, it is important that violation of the relevant representations and warranties is detailed under share purchase agreements, to achieve the parties' actual will.
The legal consequences concerning violation of the representations and warranties stipulated under the agreements differ, depending on whether the purchaser has conducted due diligence on legal, economic, tax and various other aspects on the target company, and the shares that are subject to the sale.
Kindly refer to the article titled, "Representations, Warranties and Due Diligence in Mergers and Acquisitions," for detailed information on the impact of due diligence carried out on target companies as to liability9.
Shares constitute the fundamental subject of share purchase agreements. However, purchasers generally seek and aim for the acquisition of enterprises of the company to which the shares belong. In this context, in addition to the qualifications related to the shares, the qualifications of the target company have crucial importance for purchasers.
Despite such determination, there is no specific regulation concerning the seller's liability arising from the qualifications of the target company under share purchase agreements in the TCC or the TCO.
Due to the inadequacy of the provisions of the TCO concerning sale agreements in terms of share purchase agreements, the parties usually seek to assign, in detail, the potential issues10. Accordingly, representations and warranties concerning the target company, the scope of the seller's responsibility for these and their results should be drafted, in detail, in accordance with the will of the parties in share purchase agreements.
1 Ayoğlu, T.: (2018). Sermaye Şirketleri Özelinde Şirketler Hukuku Uyuşmazlıklarının Çözümünde Tahkim, On İki Levha Yayıncılık, Istanbul, p. 251.
2 Ayan, Nurşen: "Taşınır Satımında Satıcının Kanundan Doğan Ayıba Karşı Tekeffül Borcu," https://dergipark.org.tr/tr/download/article-file/262681 (Access date: 22.12.2019).
3 Buz, Vedat: "Ortaklık Paylarının Devrinde Ayıba Karşı Tekeffül Hükümlerinin Uygulanabilirliği Sorunu" Banka ve Ticaret Hukuku Dergisi, V. 35, No. 3, 2019, p. 70.
4 For the opinion that such representations are not deemed under the scope of Article 219 of the TCO, please see. Ayoğlu, p. 257. For a different view, please see Esin, İsmail G.; Lokmanhekim, S. Tunç. "M&A Transactions Under Turkish Law", p. 39-40 (in Ayoğlu, p. 257).
5 Poroy/ Tekinalp/ Çamoğlu, Ortaklıklar Hukuku I, Rewritten 14th ed., p. 626-627.
6 Buz, p. 84.
7 Ayoğlu, p. 257.
8 Ayoğlu, p.247.
9 Orak Çelikbora, Leyla: "Representations, Warranties and Due Diligence in Mergers and Acquisitions"Erdem&Erdem Newsletter, January 2012.
10 Buz, p. 69.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.