33 / 522
The Concept of Leveraged Buyout
Leveraged buyout is an important financing method used in com-
pany acquisitions. In this method, loans that are granted to the pur-
chaser by credit institutions for the purchase of the shares of the target
company are repaid by the income of the acquired target company. The
term “leveraged buyout” reflects the financial aspect of such method.
Provided that the company’s net assets and the total proceeds procured
through the utilization of foreign debts in company activities are high-
er than the debt interest to be paid by the company, and the difference
between these will constitute the profit. Accordingly, when the propor-
tion of debt increases, the proceeds of the capital subscribed by the
shareholder increases proportionately, as well
2
. This effect is described
as the leverage effect.
One of the most important principles of the joint stock company
law is the preservation of the capital. Since the ultimate financial
source in leveraged buyout transactions is the capital of the target com-
pany, the exercise of this method is restricted in different laws.
Accordingly, the TCC in art. 380, based on the Second Company
Law Directive of European Union (“Directive 77/91/EC” or “Second
Directive”)
3
, sets forth a provision that bans leveraged buyout transac-
tions.
Purpose of the Financial Assistance Ban
The roots of the financial assistance ban leans on English law. In
England, specifically after the First World War, share purchases were
made through leveraged buyouts by using the resources of the target
companies, and many companies declared bankruptcy in the econom-
ic crises of 1920-1921. As a result, a company’s provision to finance
the acquisition of its own shares has been considered as dangerous, and
a rule prohibiting such financial assistance has been added to English
Company Law. Following England’s entry into the European Union,
such law has been included in the Second Directive.
COMMERCIAL LAW
17
2
Gül Okutan Nilsson,
Anonim Şirketlerin Kendi Hisselerini İktisabı Bağlamında Finansal
Yardım Yasağı, Anonim Şirketler Ve Sermaye Piyasası Hukukunda Güncel Gelişmeler Türk -
Alman Uluslararası Sempozyumu, August 2011, p. 91.
3
Second Council Directive 77/91/EEC dated 13 December 1976.