The Impact of Corporate Segments on Creditors and Employees

Entrance

In corporate law a divisionis a structural change resulting from a capital company transferring all or part of its assets to another company. Regulated by Articles 159 to 180 of the Turkish Commercial Code, division is a method frequently used by companies in their restructuring processes. In particular, objectives such as the reorganization of corporate groups, increased efficiency, risk diversification, and tax optimization have made division an important instrument in contemporary commercial life.

However, division transactions have significant consequences not only for company shareholders but creditors, employees, contracting parties, and public administrations . Therefore, the Turkish Commercial Code has provided detailed protective provisions to balance the effects of the division on third parties.

---

1. Definition and Types of Division

From the perspective of the Turkish Commercial Code, division is examined under two main headings:

1.1. Complete Division (Turkish Commercial Code, Article 159/1)

It is the division of a company into at least two companies by transferring all its assets without liquidation. The divided company ceases to exist; the partners receive shares in the acquiring companies.

1.2. Partial Division (Turkish Commercial Code, Article 159/2)

A portion of the assets is transferred, and the divided company retains its legal entity. This process is particularly preferred in internal company reorganizations.

1.3. Purpose of the Division

• Risk mitigation for downsizing or restructuring companies,

• Separating investment and financing models,

• Independentization of industry sectors,

• Exit or split of partners,

• Tax planning.

---

2. Legal Framework in Division Procedures

A division is not a unilateral act of disposition, but involves multiple stages such as organ decisions , a division agreement or plan , court permits , and registration in the commercial registry

General regulations are as follows:

• Turkish Commercial Code Articles 159–180: Procedure for Division

• Turkish Commercial Code Articles 175–178: Protection of Creditors

• Turkish Commercial Code Article 178: Transfer of employee contracts.

• Turkish Commercial Code Article 179: Transfer of assets and responsibility.

• Tax Procedure Law and Corporate Tax Law No. 5520: Tax implications

• Labor Law Article 6: Transfer of employment contract

In this context, the division process automatically takes effect for third parties; creditors or employees do not need to give their separate approval. However, this situation has necessitated the establishment of extensive safeguards in terms of liability for both creditors and employees.

---

3. The Effects of Demerger Transactions on Creditors

Creditor protection is central to division law. This is because when a company's assets are divided, creditors' ability to collect their debts may decrease. Therefore, the Turkish Commercial Code (TTK) provides detailed and mandatory provisions.

3.1. Right to Call on Creditors and Demand Security (Turkish Commercial Code, Articles 175–176)

After the decision to split was made, the company:

1. Announcement in the Trade Registry Gazette,

2. Call to unknown creditors,

3. Individual notification to known creditors

He has to.

Creditors have the right to demand collateral if they believe their claims are jeopardized due to the split . If collateral is not provided, the debt becomes due and payable.

Supreme Court Practice

The 11th Civil Chamber of the Supreme Court of Appeals, in its rulings, emphasizes that if the notifications made to the creditor are not in accordance with the procedure, the division cannot be asserted against the creditor; and that the right to pursue and sue the debtor company continues.

3.2. Transfer of Assets and Distribution of Burdens (Turkish Commercial Code, Article 179)

In a division of property, all or part of the assets are transferred without liquidation. This transfer occurs as follows:

• universal succession,

• legal responsibility,

• joint and several liability

She gives birth.

3.2.1. Responsibility in Case of Complete Division

All liabilities related to the assets are transferred to the acquiring companies. Since the old company has ceased to exist, all responsibility is concentrated in the acquiring companies.

3.2.2. Liability in Partial Division

According to Article 179/2 of the Turkish Commercial Code:

"The divided company shall be jointly and severally liable with the acquiring company for the debts related to the transferred assets ."

This arrangement provides strong protection for creditors.

Example

When a manufacturing company's machinery is taken over by another company, the company's debts are also transferred to that company. The creditor can choose to pursue either the divided company or the acquiring company.

3.3. Limits of Joint and Several Liability (Turkish Commercial Code, Article 179/3)

Joint and several liability is not imposed on the acquiring companies for the entire debt. The law limits this liability to the net asset value of the acquired property.

The purpose of this restriction is to prevent the acquiring company from assuming unlimited risk.

The Supreme Court's Approach

The Supreme Court requires that the assessment regarding this limit be supported by objective criteria and financial reports, and does not accept arbitrary assessments.

3.4. Creditors' Rights to File Lawsuits and Pursue Debt Collection

The division process involves the creditors:

• To initiate enforcement proceedings,

• In ongoing investigations, a change of party may occur

• To apply jointly and severally to all parties to the debt

It is not an obstacle.

If the creditor wishes:

• To the old company,

• To the new company,

• Both of them together

can apply.

This regulation elevates creditor protection to the highest level under Turkish law.

---

4. The Effects of the Split on Employees

Company employees are one of the most vulnerable groups in division processes, as the transfer of assets can also result in the transfer of employment contracts

The impact of the division on employees should be evaluated within the framework of both Article 178 of the Turkish Commercial Code and Article 6 of the Labor Law .

4.1. Automatic Transfer of Employment Contracts (Turkish Commercial Code, Article 178/1)

The law clearly stipulates:

"Employee service contracts automatically transfer."

Accordingly:

• The employee does not need to give further approval

• No other contract needs to be drawn up

• The provisions regarding the transfer of a business shall apply in full.

In this respect, the division legally constitutes a transfer of the workplace.

4.2. Employees' Right to Notice Termination (Turkish Commercial Code, Article 178/2)

Workers can terminate their contracts for just cause if they believe the change represents a significant shift for them.

Key changes:

• Deterioration of working conditions,

• The wage is at risk,

• Decreased job security,

• the new employer fails to fulfill its occupational health and safety obligations
  .

Supreme Court 9th Civil Chamber Decisions

If working conditions worsen or an employee's job security is compromised following a transfer of employees, the employee has the right to terminate the contract for just cause.

4.3. Responsibility of the Former and New Employers (Labor Law Article 6 / Turkish Commercial Code Article 178/3)

In cases of business transfer, the old and new employers are:

• From the acquired employee receivables,

• Severance pay, notice pay, overtime pay, etc.

• They are jointly and severally liable for a period of two years.

Since a division of the business also constitutes a transfer of ownership, the same responsibilities arise.

4.4. Informing Employee Representatives

In accordance with Article 171 of the Turkish Commercial Code, it is recommended that the opinions of employees or their representatives be taken into account when preparing a division plan. Although not legally mandatory, the Supreme Court may consider the failure to provide information as a negative factor in working conditions.

4.5. Impact on Collective Bargaining Agreements

The acquiring company becomes a party to the collective bargaining agreement (CBA) in effect at the workplace it acquires through division, and all provisions of the CBA are binding on the acquiring company

This situation is particularly important in terms of wage scales, social benefits, and union rights.

---

5. Problems Encountered in Practice and Supreme Court Decisions

5.1. Errors in Asset Valuation

Incorrect valuation leads to the erroneous determination of the acquiring company's liability limits. The Supreme Court has stated that in cases of faulty valuation, the acquiring company cannot benefit from limited liability.

5.2. Failure to Notify the Creditor

Creditors who have not been notified are deemed to have forfeited their security rights, and the division cannot be invoked against them.

5.3. Failure to Inform the Employee

The Supreme Court considers the employee's failure to be informed as a fundamental change in working conditions and accepts it as grounds for justified termination.

5.4. Responsibility for Severance Pay

The acquiring company is obligated to calculate the employee's seniority, taking into account the time spent with the transferring employer.

---

6. Tax Aspects and Practical Consequences

Tax regulations regarding company divisions are set forth in Articles 19-20 of the Corporate Tax Law No. 5520. Full divisions are exempt from tax; however, in the case of partial divisions:

• Valuation reports,

• Equity control,

• Transfer pricing risks

It should be evaluated closely.

Tax disputes often revolve around proof and documentation requirements under Article 3/B of the Tax Procedure Law

---

7. Conclusion and Evaluation

Company divisions are an important restructuring tool, both commercially and legally. However, protecting the rights of creditors and employees is just as critical to any division as it is to commercial interests.

Turkish Commercial Code, to creditors:

• Notification,

• Security deposit request,

• Joint and several liability,

• Right to choose a side

It provides broad guarantees such as these.

As for the employees:

• Automatic transfer of employment contract,

• The possibility of termination for just cause,

• The former and new employers shall be jointly and severally liable for a period of two years

• Validity of collective bargaining agreements

These are important protection mechanisms.

For both creditors and employees, conducting the division process transparently, with proper documentation, and in accordance with the law significantly reduces potential future disputes. Companies' meticulous execution of valuation, notification, registration, and reporting processes strengthens legal security in commercial life.