Lara Candoğan



Disputes That May Arise İn Mergers and Acquisitions Of Companies

I.                OUTLINE
There are no obligations of conduct agreed by the parties in the merger and acquisition process. Although there is no such obligation, according to good faith, the parties have obligations of loyalty and protection to each other.  In this context, they have obligations such as providing accurate information and clarification, taking care to protect each other's asset values, not promising an impossible act, not ending negotiations for no reason and untimely, not prolonging the negotiation process and avoiding actions that will lead to an increase in the price. In case of violation of these obligations, it is extremely normal for a dispute to arise between the parties, which is already a common occurrence during the merger and acquisition process because of such reasons.
The merger and acquisition process is generally divided into these three periods;
1-     Pre-Signature Period
2-     Post-Signature/Pre-Closure Period
3-     The Post-Closure Period 
As will be seen in detail, it is inevitable that disputes may occur in merger and acquisition agreements due to various reasons. In this study, we will examine the disputes that occurred during the merger and acquisition process by considering them separately in these three periods that we have mentioned. 
Before Due Diligence is performed, the parties must submit a letter of intent, a document indicating the final transaction they want to achieve with the merger and acquisition. Letters of intent may be issued in a way that they are not legally binding on the parties, or they may also be issued with binding provisions such as exclusivity and negotiation costs. However, with the letter of intent, the parties may also grant each other the right of priority in establishing the negotiated agreement, and if such a right is granted, the behavior of one of the parties in violation of it may cause a breach of debt. 
When exclusivity and confidentiality obligations are violated, proving the violation and determining the damages suffered may cause disputes between the parties that are not easy to settle. An allegation that the buyer or seller has informed third parties about the negotiation process may also lead to a dispute based on a violation of the confidentiality obligation. However, whether the letter of intent has a binding effect or not and a violation of confidentiality and exclusivity obligations may also create disputes between the parties. Other than the letter of intent, obligations of conduct such as confidentiality, exclusivity, can also be set with preliminary agreements
The letter of intent does not impose an obligation on the parties to conclude the contract. However, the letter of intent should be written carefully, otherwise it can lead to disputes later on. Likewise, negotiations and meetings of the parties on mergers and acquisitions of the company may not always result in a positive result. For example, if the pre-contract negotiation fails, one of the parties may claim compensation for damages suffered by the other party with an allegation of violation of the letter of intent or preliminary preparation agreements. 
Disputes that may arise in the event of a violation of the letter of intent and the resolution of these disputes vary depending on whether these provisions are binding or not. However, at the point where the meeting and negotiations have started and the due diligence has taken place and it is claimed that the liabilities arising from good faith have been violated -whether the contract has been concluded or not- "culpa in contrahendo’ obligation comes up.
Again, if the other party suffers damage due to the seller's defective behavior during the company's merger and acquisition negotiations, the seller's culpa in contrahendo obligation applies to this as well. On the other hand, the buyer may also cause damage to the other party due to its defective behavior in the event of these meetings. In this case, the buyer's obligation for culpa in contrahendo is also raised, and therefore the buyer will have to compensate the other party's damage. 
Culpa in contrahendo is based on the contractual trust relationship established between the parties in accordance with good faith. It is the responsibility one of the parties or its auxiliaries has over the other party or persons under their protection at the stage before the establishment of the contract. In short, it is the obligation arising from contract negotiations. Before the establishment of the contract, the parties conduct negotiations with each other regarding the content of the contract, its terms, the rights and obligations covered by it. With these negotiations, a contractual trust relationship is established between the parties. During these negotiations, a duty of care arises between the parties, according to which the parties must disclose the facts, not provide false information, protect the other party's interests, property and personal assets. If one of the parties acts contrary to these obligations and therefore causes damage to the other party, they are obliged to compensate for this damage. Therefore, it is clear that the parties have to act in accordance with their due diligence obligations during the due diligence review.
Violation of pre-contractual obligations may lead to cancellation of the merger and acquisition agreement, as well as create situations that may lead to liability in terms of acting without authority, unjustified enrichment and tort provisions in the process.
The most common disputes at this stage of merger and acquisition transactions occur when conditions called prerequisites -made in order for the merger and acquisition process to be effective and obtain results- are not carried out. 
It is likely that disputes will arise between the parties in the fulfillment process of the prerequisites. Matters which are most often the subject of disputes are; whether prerequisites are met or not, and if they are, whether they are still satisfactory for the parties even in closure, whether the parties are doing their part to carry out the prerequisites, sharing the responsibility when getting the necessary permits or approvals from the supervisory authorities, and the consequences of not getting them, the buyer not being satisfied with post-signature inspection and the due diligence process. 
Sometimes, during the period between the signing of the contract and the closure, changes may occur that will negatively affect the acquisition. The parties that do not want to be harmed by these changes put substantial alteration clause in merger and acquisition agreements. Through this clause, in case of a change in financial circumstances, value of the assets, responsibilities or operational results revealed by the due diligence process performed during contract negotiations, the right to terminate the contract by the vote of the majority is given. Disputes may arise between the parties because of this clause as well. 
After the closure, disputes arising from price determination and implementation of representations&warranties between the parties are mostly encountered. Therefore, before the parties prepare their representations&warranties, they must determine the basic rules of the contract.

The alleged violation of the elements agreed between the parties -such as non-competition, confidentiality, enticing the employees, not offering them a job, and the obligations set out in the shareholder agreement- is also a reason of dispute that may occur in the closure period. 

            It is necessary to list and explain the disputes that may occur in the post-closing period down below. 

In mergers and acquisitions of a company, a share purchase and sale agreement is signed between the buyer and the seller. This agreement is an agreement about the acquisition of the target company  In accordance with this agreement, an enterprise is acquired by transferring shares or assets. In the base of this agreement -the purpose of which is acquisition- lies assets or shares. In this case, the emergence of an uncalled defect in terms of assets poses a deficiency of due qualification. Regarding such cases, if no regulations have been made by the parties, warranter provisions can be relied on. 
The seller's warranter responsibility in the sale agreements is issued in Turkish Code of Obligations from article 219 to 231. Accordingly, the seller also guarantees that  the goods will be delivered to the buyer without defect as a side act of the obligation to transfer the ownership of the goods in question to the buyer. 
In order for the seller to be able to address a warranter, the conditions down below are necessary;
·       That the defect in the sold product exists at the time the buyer takes over the benefits and losses by contract.
·       That the defect in what was sold was significant
·       That the defect in what was sold was a hidden defect
·       That the liability was not lifted by the contract
·       That the product has been delivered to the buyer. 
In addition, the seller may also be held responsible if the qualities that the seller specifically stated are not on the sold product. But the question of whether the warranter provisions can be relied on or not is controversial in the doctrine. In the doctrine, there are writers and thinkers who argue that because of deficiencies in due qualifications, the warranter provisions can be relied on and some who argue that they cannot.
The scope and consequences of the warranter responsibility must be regulated in detail in the contract in order to prevent disputes about whether the warranter provisions will be valid when encountered with lack of necessary qualifications in company mergers and acquisitions. 
In cases where the seller has warranter responsibility in the merger and acquisition agreement, the matter of which optional rights the buyer will use is also a separate issue. A number of optional rights have been granted in accordance with Article 277 of  Turkish Code of Obligations after the seller's warranter against the buyer have taken place These optional rights can be listed as;
·       Rescission of the contract

·       Asking for a discount on the sale price

·       Requesting a free repair of what was sold

·       Replacing what was sold with a similar defect-free one.

It is not necessary to file a lawsuit in order to exercise these optional rights. However, in practice, the exercise of optional rights without a lawsuit does not bear a meaning.
The parties may agree that the seller has no warranter responsibility when establishing the contract after due diligence review. In art.221 of the Turkish Code of Obligations states that if the seller is seriously at fault, the irresponsibility agreement will be invalid, if not, the parties may make a valid irresponsibility agreement. Accordingly, if a serious defect by the seller is on the table, the irresponsibility agreement concluded by the parties will not be valid. In the event that the irresponsibility agreement is not valid, the right to rescind the contract and to reduce the price may be exercised. 
            Matters such as deception and wrongdoings may have an effect on the validity of provisions that remove or limit the parties' responsibilities. But it is also not very easy to prove the existence of these situations. 
      In almost every merger and acquisition transaction that takes place through share transfer, there is a possibility that third parties will make justified demands from the target company that will result in a violation of the seller's statements and commitments. In the event of such a situation, matters may arise that will lead to a dispute between the parties of the merger and acquisition process. 

      The appropriate course of action when such a situation occurs is usually agreed on by the parties of the merger and acquisition agreements. Accordingly, provisions such as; the buyer informing the seller of a third-party's requests and the buyer allowing the seller to manage the process, the buyer and seller cooperating over a third-party's requests, and not fulfilling the third-party's request without the seller's permission, the seller informing the buyer of a third-party's requests, may be included. 

      In some cases, due to business life, the target company may want to resolve this issue with its client without resorting to any judicial means and may not even notify the buyer of the existence of such a request. In such cases, the issue of whether the seller can intervene in the relationship between the target company and its client will arise. In order to avoid such situations, matters such as determining whether the result of a trial (if any) between the target company and its client will be binding for the buyer, whether the seller will be obliged to assist the buyer or the target company in the trial process, should be decided. This way, a dispute between the parties can be prevented. 

Disputes arising from the price are one of the most common merger and acquisition disputes. In order not to encounter this problem, first of all, it is necessary to determine which criteria will be used when estimating the price. Various methods are used when conducting these estimations. Whichever of the methods is chosen, the final or temporary price can be decided in the contract based on the chosen one. The temporary price may increase or decrease according to the criteria agreed by the parties.
It is natural in merger and acquisition transactions that the seller would want to avoid selling the subject of the transaction for a price below the value, and the buyer would want to avoid paying a price higher than it is worth. In merger and acquisition transactions, the parties may provide an agreement on issues that will affect the determination of the price. In this case, it is important to find alternatives to determine the price to be paid rather than risking the execution of the merger and acquisition transaction in terms of ensuring the interest that the parties expect from the transaction.
V.              RESULT 
Mergers and acquisitions of companies have an important place in terms of commercial life. The process of mergers and acquisitions the company is a difficult process, matters such as; parties not complying with the provisions of the contract they concluded, acting against their obligations for each other, violation of pre-emption or pre-emptive right regulated by shareholders' agreement between existing shareholders will affect the completion of the process. Again, due to these and the various disputes that we mentioned above, the contract may be canceled. 
Culpa in contrahendo responsibility comes up when one of the parties display behaviors that undermine the trust relationship the parties have developed during contract negotiations. In case of culpa in contrahendo obligation, it is also possible to compensate for the caused damages. 
In company merger and acquisition agreements, the seller may also have warranter responsibility. If the terms of the seller's warranter responsibility have been fulfilled, there will be some optional rights provided that the buyer fulfills the burdens imposed on them. If the nature of the company's merger and acquisition agreement is also taken into account, using the optional right of price reduction will be in accordance with the interests of the party.  
In order not to encounter the disputes mentioned in this process and not to use the optional rights or to cancel the contract as a result, it is extremely important for the parties to act carefully and diligently. 

This article explains in detail the disputes that may arise during the merger and acquisition process and the steps to be taken to prevent these disputes. It is extremely important for the parties to identify the risks that may arise beforehand and take appropriate measures in order to prevent severe consequences such as cancellation of the contract.