Mergers and Acquisitions (M&A) Guide: Legal Process and Considerations
Mergers and acquisitions (M&A) are one of the most important tools of companies’ growth strategies, market share expansion targets or access to new technologies and markets. While a successful M&A transaction can create great synergy and value for the parties, a poorly managed process can result in unexpected legal risks, financial losses and operational chaos. The process involves not only financial negotiations but also a complex and multi-stage legal process. Each step must be taken carefully, especially within the framework of the Turkish Commercial Code, the Code of Obligations and the Law on the Protection of Competition. In this article, we will analyse in detail the legal roadmap of a typical takeover transaction, the main stages from inception to closing and the critical points to be considered at each stage.
Phase 1: Preparation, Strategy and Initial Contact This phase is the preparatory process before coming to the table. The buyer determines the acquisition strategy (market entry, competitor elimination, technology transfer, etc.) and analyses potential target companies. Once the target company has been identified, initial contact is established, usually through an investment bank or advisor. The information shared at this stage is usually limited to publicly available information.
Stage 2: Non-Disclosure Agreement (NDA) Once the parties have decided to enter into more serious discussions, the first legal step is to sign a non-disclosure agreement. This agreement commits that sensitive commercial, financial and legal information (trade secrets, customer lists, financial data, etc.) that the buyer will receive from the target company during the due diligence process will be kept confidential and will only be used for the purpose of evaluating the acquisition. The NDA is a vital document to protect the target company’s confidential information, which is its most valuable asset.
Stage 3: Letter of Intent (LoI – Letter of Intent / Term Sheet) If the initial investigations are favourable and the parties reach a preliminary agreement on the outline of the deal, they sign a letter of intent or term sheet. This document, although usually not legally binding, sets out the good faith of the parties and the basic framework of the agreement. The LoI typically contains the following elements:
- Estimated purchase price and method of payment (cash, shares, etc.).
- The scope and duration of the due diligence process.
- An obligation on one of the parties not to negotiate with other buyers for a certain period of time (exclusivity).
- The basic conditions for closing the deal.
- Which provisions are binding (such as confidentiality, exclusivity) and which are not.
Stage 4: Due Diligence – The Most Critical Stage This is the stage where the buyer fully understands “what they are buying”. The buyer’s lawyers, financial advisors and technical advisors take an X-ray of the target company. This process is carried out in different areas:
- Legal Due Diligence: Conducted by lawyers. The company’s founding documents, articles of association, shareholding structure, general assembly and board of directors decisions, all important contracts (supply, distributorship, credit, lease, etc.), ongoing or potential lawsuits, real estate and intellectual property rights (trademarks, patents), administrative permits and licences, labour law practices and employee contracts are examined in detail. The aim is to conduct a legal “health screening” of the company to identify potential risks, lawsuits and liabilities awaiting the buyer after the acquisition.
- Financial Due Diligence: Conducted by financial advisors. The financial statements, tax returns, debts, receivables and cash flows of the company for the previous years are analysed.
- Operational and Commercial Due Diligence: The company’s market position, competitiveness, operational efficiency and technological infrastructure are analysed. The findings of due diligence may lead either to renegotiation of the purchase price, the inclusion of special protective provisions (declarations and warranties, indemnification clauses) in the share transfer agreement, or the cancellation of the transaction altogether.
Phase 5: Negotiation and Signing of the Share Purchase Agreement (SPA) After the due diligence process is completed, the parties negotiate the main legally binding agreement, the Share Purchase Agreement (SPA ), which contains the final terms of the deal. This is the most complex and important legal document of the M&A process. The SPA typically contains the following provisions
- A description of the shares subject to the transfer and the transfer price.
- Representations and warranties made by the seller about the state of the company (e.g., “all taxes have been paid”, “there are no material lawsuits against the company”).
- Indemnity clauses that protect the buyer’s rights in case of breach of these representations and warranties.
- Rules on how the company will be managed between signing and closing.
- Preconditions that must be fulfilled for the closing to take place (e.g. obtaining the authorisation of the Competition Authority).
- Dispute resolution (arbitration or competent court).
Stage 6: Obtaining Authorisations and Closing
- Competition Authority Authorisation: If the acquisition transaction exceeds the turnover thresholds set by the Competition Authority, it is mandatory to obtain authorisation from the Authority in order for the transaction to be legally valid. Acquisitions made without authorisation are invalid and serious fines may be imposed on the parties.
- Other Authorisations: Depending on the sector of activity (banking, energy, insurance, etc.), authorisation from other regulatory authorities (such as BRSA, EMRA, etc.) may also be required.
- Closing: After all prerequisites are fulfilled and the necessary permits are obtained, the parties come together at the “closing” meeting. At this meeting, the share transfers are made (share registry in joint stock companies, notary transfer and registration in limited liability companies) and the purchase price is paid. With the closing, the ownership and control of the company is legally transferred to the buyer.
Mergers and acquisitions are complex processes that offer great opportunities when managed correctly, but each step is fraught with legal risks. Starting from the confidentiality agreement, conducting due diligence meticulously, negotiating the share transfer agreement to cover all risks and obtaining the necessary legal authorisations are vital for the success of the transaction. In this process, it is not just a recommendation, but a sine qua non for a successful transaction that both the buyer and the seller work with a professional team of legal and financial advisors experienced in M&A.