Bought a Turkish company based on false financial statements? Learn about compensation, contract avoidance, warranty claims, fraud allegations, price recovery and legal remedies available to foreign buyers in Turkey.

A foreign investor purchasing shares in a Turkish company will often determine the acquisition price by relying heavily on the target company’s financial statements. Revenue, profitability, debt, receivables, cash flow and asset values can directly influence whether the buyer completes the transaction and how much it agrees to pay.

Problems arise when the financial picture presented before closing is materially different from reality.

Revenue may have been inflated. Liabilities may have been omitted. Receivables may be fictitious or uncollectible. Related-party transactions may have been concealed. Inventory may have been overstated. Expenses may have been shifted between accounting periods to artificially increase profitability.

In more serious cases, the financial statements may have been deliberately manipulated to make the company appear more valuable before the sale.

For a foreign buyer, discovering false financial statements after paying millions for company shares can create several possible remedies under Turkish law. Depending on the transaction documents and evidence, these may include breach-of-warranty claims, indemnification, compensation, purchase-price recovery, avoidance of the share purchase agreement, claims against responsible persons and potentially criminal proceedings where intentional fraudulent conduct can be established.

The correct strategy begins by answering one question:

Were the financial statements simply inaccurate, or were they intentionally manipulated to induce the acquisition?

Why Financial Statements Matter in Company Acquisitions

Financial information frequently forms the basis of company valuation.

Suppose a Turkish company is represented as generating annual revenue of EUR 20 million and EBITDA of EUR 4 million.

The foreign investor agrees to purchase the company based on an agreed valuation multiple.

After closing, the investor discovers that genuine EBITDA was only EUR 2 million.

If the purchase price was directly calculated using the inflated EBITDA figure, the financial misstatement may have caused the buyer to substantially overpay.

The legal analysis should therefore examine both the falsity of the financial information and its effect on the acquisition price.

Common Types of False Financial Information

Financial manipulation can take many forms.

Some of the most important acquisition disputes involve overstated revenue, fictitious sales, hidden liabilities, inflated inventory, nonexistent cash, concealed related-party debt, fictitious receivables, manipulated EBITDA and undisclosed tax liabilities.

Timing can also be manipulated.

Revenue belonging to a later accounting period may be recognized prematurely, while expenses belonging to the pre-closing period may be postponed.

The result is an artificially profitable company immediately before acquisition.

Inflated Revenue Before Closing

Suppose the seller tells the foreign investor that annual revenue is EUR 15 million.

After acquisition, the buyer discovers that EUR 3 million of reported sales consisted of transactions with companies controlled by the seller.

Some transactions were later reversed.

Others were never paid.

The buyer should examine invoices, bank records, customer confirmations, related-party relationships and accounting entries.

The fact that a sale appears in accounting records does not necessarily prove that it represented genuine sustainable revenue.

Fictitious Receivables

Accounts receivable can substantially affect company valuation and working-capital calculations.

A target may report EUR 5 million of receivables.

After closing, the foreign buyer attempts collection and discovers that EUR 2 million is disputed, nonexistent or owed by insolvent entities.

The buyer should compare the receivables ledger provided during due diligence with invoices, contracts, customer confirmations and subsequent collections.

The central question is what the seller knew about collectability when the financial information was presented.

Hidden Liabilities

A company can also be made to appear more valuable by hiding debt.

Undisclosed liabilities may involve bank borrowing, supplier debts, shareholder loans, tax exposure, employee liabilities or pending litigation.

The investor should compare the pre-closing balance sheet with post-closing discoveries.

If the share purchase agreement contains a warranty that all material liabilities were properly disclosed, the buyer may have a contractual claim even where proving intentional fraud is difficult.

Manipulated EBITDA

EBITDA disputes are particularly important in acquisitions because purchase prices are frequently calculated using valuation multiples.

Suppose the parties agree on a purchase price based on eight times EBITDA.

The seller reports EBITDA of EUR 3 million.

The resulting enterprise value is approximately EUR 24 million.

After closing, forensic accounting shows that normalized EBITDA was actually EUR 2 million.

A EUR 1 million EBITDA overstatement can therefore create a substantially larger valuation distortion.

Expert evidence may be required to establish the correct financial figure and resulting loss.

Fake Sales Before Year-End

A common warning sign is a sudden increase in sales immediately before the financial year closes or immediately before acquisition negotiations.

The buyer should investigate whether these transactions were genuine.

Were goods actually delivered?

Did customers pay?

Were invoices later cancelled?

Were the customers related parties?

Did goods return after closing?

A pattern of artificial year-end transactions can become important evidence of intentional financial manipulation.

Overvalued Inventory

Inventory can materially affect working capital and company value.

Suppose the target reports EUR 4 million of inventory.

After closing, the buyer discovers that a significant portion is obsolete, damaged or commercially worthless.

The acquisition documents should be examined to determine what representations were made concerning inventory quantity, condition and valuation.

Stock counts and valuation reports can become important evidence.

Hidden Related-Party Transactions

A company’s profitability can appear stronger when related-party transactions are not properly understood.

For example, a company controlled by the seller may temporarily purchase products from the target immediately before closing, creating artificial revenue.

After the acquisition, those transactions stop.

The buyer should identify the beneficial ownership of major customers and suppliers and investigate unusual transactions occurring during the pre-closing period.

Undisclosed Tax Liabilities

False or incomplete financial statements may also hide substantial tax exposure.

A company may appear to have no significant liabilities but later receive assessments relating to pre-closing periods.

The acquisition agreement should be checked for tax warranties and tax indemnities.

The investor should determine whether the underlying tax risk existed before closing and whether it should have been disclosed.

False Cash Position

A buyer may be told that the target holds substantial cash.

Immediately before closing, however, the money may be transferred to the seller or an affiliated business.

The buyer should reconcile bank statements with the closing accounts.

If the purchase price was calculated on a cash-free/debt-free basis or subject to a closing adjustment mechanism, the financial consequences can be substantial.

Share Purchase Agreement Is the Starting Point

When false financial statements are discovered, the first document to review should normally be the share purchase agreement.

The agreement may contain specific warranties concerning:

financial statements,

accuracy of accounts,

undisclosed liabilities,

tax compliance,

receivables,

inventory,

material contracts,

litigation,

and related-party transactions.

The seller’s contractual liability may therefore be broader than liability based solely on intentional fraud.

Financial Statement Warranty

A typical acquisition agreement may state that the financial statements give an accurate picture of the company’s financial position and were prepared consistently with applicable accounting requirements.

The exact wording matters.

Some warranties may be absolute.

Others may be qualified by the seller’s knowledge or materiality thresholds.

The investor should avoid assuming that all financial warranties provide identical protection.

Disclosure Letter

The warranty section should never be read without the disclosure letter.

The seller may have disclosed specific exceptions.

For example, the agreement may warrant that no material tax dispute exists, while the disclosure letter identifies a particular pending tax assessment.

If the matter was properly disclosed, the purchaser’s later warranty claim may face difficulties.

The buyer should therefore compare every alleged misstatement with the disclosures actually made before closing.

Data Room Evidence

Virtual data room records can become decisive.

The buyer should preserve, where lawfully available, the documents provided during due diligence, the data room index, Q&A records and subsequent uploads.

Timing matters.

A seller may claim that a liability was disclosed.

The buyer may respond that the relevant document was uploaded only hours before closing or was never made available.

Preserving the original data room record can help resolve this dispute.

Due Diligence Does Not Automatically Protect the Seller

A seller may argue that the buyer had accountants and lawyers and therefore should have discovered the financial problem.

That does not automatically eliminate liability.

The legal effect depends on the contractual allocation of risk, information actually disclosed and nature of the alleged misrepresentation.

A seller who provides an express warranty may still face contractual liability depending on the agreement, even where the purchaser conducted extensive due diligence.

Deliberate concealment creates even more serious issues.

Fraudulent Misrepresentation Under Turkish Law

Intentional deception can provide a separate legal basis.

Article 36 of the Turkish Code of Obligations regulates agreements entered into because of deception. A party induced to conclude a contract through the other party’s deception may potentially avoid being bound by the agreement under the statutory conditions.

The official legislation database provides the current text of Code of Obligations No. 6098.

Turkish Code of Obligations No. 6098

This remedy can become relevant where financial information was intentionally manipulated to persuade the buyer to complete the acquisition.

Critical One-Year Period After Discovery

Article 39 of the Turkish Code of Obligations is particularly important.

Where the requirements concerning mistake or deception are satisfied, the affected party generally must exercise the relevant avoidance right within one year from discovering the mistake or deception.

Foreign buyers should therefore record precisely when they first discovered the suspected manipulation.

The acquisition may have closed several years earlier, but the discovery date can still be critically important under this particular mechanism.

Contractual warranty claims and other damages claims may be governed by different periods.

Every potential claim should therefore be calculated separately.

Cancellation or Compensation?

This is one of the most important strategic decisions.

Suppose the buyer discovers that it substantially overpaid but still wants to own the business.

Cancelling the entire acquisition may make little commercial sense.

The investor may instead prefer compensation or enforcement of contractual indemnities.

Conversely, if the company’s financial position was so fundamentally misrepresented that the investor would never have purchased the shares, unwinding the transaction may deserve consideration.

The legal remedy should support the investor’s commercial objective.

Can the Buyer Recover the Purchase Price?

Potentially, depending on the remedy.

If the transaction is validly unwound, restitution issues can arise, including return of the purchase price and shares.

If the investor keeps the shares, recovery may instead take the form of contractual damages, indemnification or another compensation claim.

The two approaches should not be confused.

A buyer normally cannot simply keep all acquired shares while automatically demanding the entire purchase price back.

Overpayment Damages

A common claim is that the buyer paid more than the shares were actually worth because of false financial information.

For example:

Reported EBITDA: EUR 5 million.

Actual normalized EBITDA: EUR 3 million.

Agreed valuation multiple: 7x.

The financial discrepancy may have produced a very substantial valuation difference.

But calculating legal damages is not always as simple as multiplying the discrepancy.

The contractual pricing mechanism and applicable damages rules must be considered.

Forensic Accounting

False financial statement disputes frequently require accounting experts.

A forensic review may examine journal entries, invoices, bank transactions, receivables, inventory movements, related-party transactions and revenue recognition.

The objective is not merely to show that current results are poor.

The investor must establish what the company’s genuine financial position was at the relevant pre-acquisition date.

Seller Knowledge

Knowledge can become particularly important where intentional deception is alleged.

The investor should investigate whether the seller knew the financial information was false.

Internal emails can be powerful evidence.

Suppose the seller’s finance team writes internally:

“These receivables will never be collected, but leave them in the acquisition figures.”

If properly authenticated and lawfully obtained, evidence of this nature can materially change the dispute.

What If the CFO Prepared the False Statements?

Responsibility may extend beyond the seller depending on the facts.

The investor should determine who prepared the information, who approved it, who provided it to the purchaser and who knew it was inaccurate.

Possible responsibility of directors, managers or professional advisers requires separate legal analysis.

The existence of false statements does not automatically make every officer personally liable.

Director Liability

Where directors culpably breach statutory obligations and cause legally recoverable damage, director-liability rules under Turkish company law may potentially become relevant.

However, the identity of the injured party matters.

A loss suffered directly by the purchaser because it overpaid for shares may differ from a loss suffered by the target company because its directors misused company assets.

The correct claimant must be identified.

Auditor Liability

Where audited financial statements were involved, the role of the auditor may require examination.

An auditor is not automatically liable merely because an error is later discovered.

The investor would need to examine the auditor’s duties, applicable auditing standards, nature of the error, reliance, causation and damage.

Engagement terms can also affect the analysis.

Can False Financial Statements Constitute Criminal Fraud?

Potentially, where the statutory elements are satisfied.

The Turkish Penal Code regulates fraud involving deceptive conduct used to obtain an unlawful benefit at another person’s expense.

If financial statements were deliberately fabricated to induce a foreign buyer to pay an inflated purchase price, criminal-law issues may require evaluation.

However, accounting errors, valuation disagreements and breached warranties should not automatically be characterized as criminal fraud.

Intentional deceptive conduct must be established.

Turkish Penal Code No. 5237

Commercial Lawsuit and Criminal Complaint Can Be Separate

A criminal investigation does not automatically compensate the buyer.

The investor may still need commercial proceedings seeking damages, restitution or enforcement of contractual rights.

Similarly, failure to prove criminal fraud does not automatically mean that contractual warranty claims fail.

Criminal responsibility and contractual liability have different requirements.

Interim Asset Protection

If the seller received a substantial acquisition price and begins transferring assets after the dispute emerges, urgent protection may become important.

Depending on the claim and evidence, provisional attachment or other interim measures may potentially be available under Turkish procedural and enforcement law.

The investor should investigate assets early rather than waiting until a final judgment.

Purchase Price Held in Escrow

Where part of the acquisition price remains in escrow, the buyer may have significantly stronger practical protection.

The escrow agreement should be reviewed immediately.

The investor should determine whether a warranty claim allows funds to remain blocked and what notice must be given to the escrow agent.

Missing a contractual claim-notification deadline can create unnecessary problems.

Deferred Purchase Price

Some acquisitions involve deferred consideration.

If financial manipulation is discovered before later installments become due, the buyer should not automatically stop payment without reviewing the contract.

Set-off rights, suspension rights, warranty mechanisms and contractual default consequences should first be examined.

An unjustified refusal to pay may create a counterclaim by the seller.

Earn-Out Manipulation

False financial statements can also affect earn-out arrangements.

A seller may manipulate post-closing financial figures to increase an earn-out payment.

Alternatively, a buyer may be accused of manipulating performance to reduce it.

The acquisition agreement’s accounting principles and dispute-resolution mechanism become particularly important in these cases.

Arbitration Clauses

Cross-border acquisitions frequently require disputes to be resolved through arbitration.

The buyer should review the dispute-resolution clause before filing proceedings.

A Turkish-law-governed share purchase agreement can still provide for arbitration.

The forum, governing law and place of arbitration should not be confused.

Mandatory Contractual Notice Procedures

Many acquisition agreements require warranty claims to be notified in a specific form.

The notice may need to identify the breach, estimated loss and relevant warranty.

There may also be contractual time limits.

Foreign investors should therefore avoid sending an informal complaint and assuming that it satisfies the SPA’s formal claim requirements.

Preserve the Original Financial Statements

Do not rely only on the company’s current accounting system.

Preserve the exact financial information supplied before the acquisition.

This includes PDF statements, spreadsheets, management accounts, forecasts, valuation models and presentations.

File metadata and transmission records may also become relevant where authenticity is disputed.

Preserve the Valuation Model

The investor must often prove not only that the financial information was false but also that it affected the purchase price.

The original valuation model can establish this connection.

If the investment committee calculated the price using an EBITDA multiple, preserve that calculation.

If the transaction used discounted cash flow, preserve the assumptions.

This evidence can help establish causation between the misstatement and overpayment.

Practical Example: EUR 12 Million Acquisition

Assume a foreign investor purchases 100% of a Turkish company for EUR 12 million.

The seller provides financial statements showing EBITDA of EUR 2.5 million and no material undisclosed debt.

After closing, forensic accounting discovers:

EUR 1 million of fictitious receivables,

EUR 750,000 of undisclosed supplier debt,

EUR 500,000 of questionable related-party sales,

and substantial pre-closing tax exposure.

The investor should first determine which findings breach specific SPA warranties.

The disclosure letter and data room should then be reviewed to determine whether any issue was disclosed.

The investor should calculate how the corrected financial information would have affected the purchase price.

If evidence suggests deliberate manipulation, Articles 36 and 39 of the Code of Obligations should also be evaluated.

The buyer must then decide whether it wants compensation while retaining the company or to pursue a remedy aimed at unwinding the acquisition.

Immediate Action Plan for Foreign Buyers

First, preserve every version of the financial information received before closing. Second, secure the complete data room and due-diligence record. Third, identify each allegedly false accounting item separately. Fourth, review the SPA warranties, indemnities, liability caps and notification requirements. Fifth, record when each discrepancy was discovered. Sixth, commission financial analysis where necessary to determine the real pre-closing position and valuation impact. Finally, investigate whether the seller is moving assets and whether interim protection is required.

Speed is particularly important where contractual notice periods or the one-year discovery period for deception may be running.

Frequently Asked Questions

Can I sue a seller for false financial statements in a Turkish company acquisition?

Potentially. Contractual warranties, indemnities, damages rules and intentional-deception provisions may provide different causes of action depending on the transaction.

Can I cancel the share purchase agreement?

Potentially, particularly where qualifying intentional deception materially caused the acquisition. The statutory conditions and consequences of unwinding the transaction must be carefully examined.

How long do I have after discovering fraud?

For the avoidance mechanism based on deception under the Code of Obligations, Article 39 generally provides a one-year period from discovery. Other claims can have different periods.

Can I keep the company and claim compensation?

Potentially. In many acquisition disputes, the buyer prefers damages or indemnification rather than unwinding the transaction.

What if the seller hid company debt?

The SPA, financial warranties and disclosure materials should be reviewed. Undisclosed debt can potentially support contractual claims.

Does due diligence prevent a claim?

Not automatically. What was actually disclosed, the wording of the warranties and whether information was deliberately concealed all matter.

Can manipulated EBITDA support compensation?

Potentially. The buyer must establish the correct EBITDA, the contractual valuation mechanism and the financial effect of the misstatement.

Can I file a criminal complaint for false financial statements?

Potentially, where evidence supports intentional deceptive conduct satisfying the elements of an offense. An accounting error or warranty breach alone does not automatically constitute fraud.

Can the seller’s assets be frozen?

Potentially, where the requirements for an applicable provisional attachment or interim measure are satisfied.

Should I hire a financial expert?

In substantial acquisition disputes, forensic accounting and valuation analysis can be extremely important for proving both the financial manipulation and resulting loss.

Client-Focused Legal Support for Foreign Buyers

False financial statements in a Turkish company acquisition should be investigated by reconstructing the target company’s actual financial position at the time the buyer agreed to the transaction.

Poor post-acquisition performance is not enough. The buyer must establish what information was supplied before closing, why it was inaccurate, whether the seller knew or should bear contractual responsibility for the discrepancy and how the incorrect figures affected the purchase price.

The share purchase agreement is usually central. Financial warranties, tax warranties, undisclosed-liability provisions, indemnities, disclosure schedules, liability caps, contractual notification deadlines, escrow arrangements and dispute-resolution clauses can materially determine the recovery strategy.

Where the evidence indicates intentional deception, the Turkish Code of Obligations provides additional remedies that should be considered promptly, particularly because Article 39 establishes an important period linked to discovery of deception.

Depending on the circumstances, a foreign buyer’s strategy may therefore combine breach-of-warranty claims, indemnification, purchase-price compensation, contract avoidance, restitution, forensic accounting, interim asset protection, director or professional liability claims and, where supported by evidence, criminal proceedings.

Fırat Fesih Kaya Law Office assists foreign investors and international companies with company acquisition disputes, false financial statements, hidden liabilities, manipulated EBITDA, breach-of-warranty claims, purchase-price disputes, investment fraud allegations, compensation claims and cross-border corporate litigation in Turkey.

Phone: +90 312 434 22 22
Mobile: +90 532 769 22 22
Email: info@firatfesihkaya.av.tr
Address: Mevlana Boulevard No: 221, Yıldırım Tower, Balgat, Çankaya, Ankara, Turkey