Newsletter-21

26 NEWSLETTER 2016 Cross Shareholding in Group of Companies* Prof. Dr. H. Ercument Erdem Introduction Cross shareholding means, in general terms, the participation of two companies to each other’s capital. In various jurisdictions, includ- ing Turkey, this concept is dedicated to the situations where the cross shareholding ratio is above a certain percentage. Cross shareholding below such percentage is considered beyond the scope of the legal framework, and no consequences are attached thereto. It is also com- mon that special sanctions apply to situations where one of the compa- nies in the cross shareholding structure is dominant over the other, or both companies are in a dominant position against each other. In legal doctrine, situations where there is no dominant relationship between the two companies are referred to as “simple cross shareholding” and where there is as “qualified cross shareholding.” This newsletter addresses the provisions of the Turkish Commercial Code 1 (“TCC”) regarding simple and qualified cross shareholding. Purpose of the Regulation Cross shareholding has certain drawbacks in terms of principle of protection of capital, transparency of financial statements and independency of management. Jurisdictions usually permit cross shareholding while introducing various sanctions. In the preamble of Articles 197 and 201 of the TCC, it is stated that the sanctions set forth under the Turkish law aim to “prevent issues, such as dilution of capital (fictitious capital), hesitation on trueness of the balance sheet” and “restrict the effects of the shares of the same origin on the manage- ment”. According to the preamble, again, existence of Article 197 of * Article of February 2016 1 Official Gazette February 14, 2011, No. 27846. It has entered into force on July 1, 2012.