Providing Collaterals, Pledges, Mortgages and Sureties by Public Listed Corporations
Introduction
There is no specific procedure in the Turkish Commercial Code (TCC) that publicly traded corporations must follow in terms of providing collaterals, pledges, mortgages and sureties (CPMS). Authority for and procedure of provision of CPMS are determined according to the general rules. On the other hand, CPMSs to be issued by publicly traded corporations during their activities are specifically regulated in the Capital Markets Legislation. Just as publicly listed corporations (PLCs) must comply with these procedures when providing CPMSs, corporations must also make the CPMSs they establish before going public should comply with the Capital Markets Legislation within a certain period of time and eliminate the CPMSs which are not compliant to Capital Markets Regulation.
In this study, firstly, the general principles in terms of TCC are mentioned, then the regulations in the Capital Markets Legislation are examined and the issues that need to be taken into consideration are mentioned.
Overview according to TCC
In terms of TCC, the general rule is that corporations are managed and represented by the board of directors. Unless otherwise provided in the articles of association or if the board of directors does not consist of a single person, the authority of representation belongs to the board of directors to be used with double signature. The Board of Directors may delegate its representation authority, except for non-transferable powers that fall under the exclusive authority of the General Assembly and the board of directors. In this case, persons authorized to represent could carry out all kinds of work and transactions that fall within the purpose and scope of business of the corporation on behalf of the corporation. When we look at the non-delegable powers of the Board of Directors and the non-delegable powers of the general assembly, we see that there is no special provision regarding CPMS. In this context, it is possible to say that no special restrictions or procedures are foreseen for CPMSs under the TCC.
Capital Markets Legislation
Permited CPMSs
In the Capital Markets Legislation, CPMSs are regulated in the Corporate Governance Communiqué (CC Communiqué) II.17-1. Article 12 of the CC Communiqué regulates to whom PLCs could provide CPMS and by following which procedures they can provide[1]. Accordingly, PLCs and their subsidiaries could provide CPMS,
- In favor of their own legal entity
- In favor of corporations that are fully consolidated in their financial statements,
- In favor of other third parties for the purpose of conducting its own ordinary
commercial activities.
They could not provide CPMS in favor of third parties other than these CPMSs.
The CG Communiqué sets out a separate principle regarding subsidiaries and joint ventures. Accordingly, CPMS may be provided in favor of subsidiaries and joint ventures in which there is direct capital contribution, in proportion to the directly contributed capital share. At this point, it is considered that the CPMSs provided in favor of subsidiaries and joint ventures exceeding this portion will fall within the scope of CPMSs provided in favor of other third parties for the purpose of conducting its own ordinary commercial activities and will be subject to the same procedure.
There is also a board decision published by the Capital Markets Board (CMB) regarding the persons in whose favor CPMS can be provided. In accordance with the CMB's decision dated 27.1.2016 and numbered 3/73, published in the CMB Weekly Bulletin numbered 2016/3, the following CPMSs are accepted as not violating the CG Communiqué art. article 12.
- PLCs or their subsidiaries provide CPMS in favor of the group company providing funds to them, limited by the amount of funds transferred to them.
- Non-public subsidiaries provide CPMS in favor of their publicly traded parent company.
In this context even though it is not within the scope of CG Communiqué art. Article 12, a PLC may grant CPMS to a group company[2] (for example, a group company other than the partnerships they include in full consolidation in their financial statements) that provides funds to the PLC. The amount of CPMS that can be provided is limited with the funds provided by the group company
Procedure to provide CPMS
A special decision procedure is not envisaged for the CPMSs to be provided by PLCs in favor of their own legal entities and in favor of corporations that are fully consolidated in their financial statements. In this context, as a rule, it can be considered that the authority here is within the framework of the explanations made under the section titled "Overview according to TCC”
However, in CG Communiqué art. 12/3, it is stated that the positive vote of the majority of the independent board members is required in the decisions of the board of directors regarding the CPMS to be provided in favor of other third parties for the purpose of conducting its own ordinary commercial activities. Although a special procedure is not explicitly required for all CPMSs, it might be considered the way in which CG Communiqué is an art. 12/3 is written (ie it’s wording) allows for the interpretation that a CPMS, and that the affirmative vote of the majority of independent members is required in the decisions of the board of directors only for those to be provided in favor of other third parties for the purpose of carrying out ordinary commercial activities. For this reason, considering that CPMSs are specially regulated and that they are special transactions in terms of capital market legislation and corporations, in order to eliminate the risk of non-compliance with the legislation, for all CPMSs with certain characteristics, such as high amounts, CPMSs established for foreign persons, it may be thought that it would be appropriate to take a decision of the board of directors.
In any case, a board of directors' decision must be taken and the positive vote of the majority of independent members must be present for the board of directors' decision to be taken in respect of CPMS to be established in favor of other third parties for the purpose of conducting its own ordinary commercial activities. If the majority of independent board members do not vote in the affirmative, the reason for opposition must be disclosed on the Public Disclosure Platform (PDP). Additionally, board members who are related parties cannot vote on this decision.
In all cases, a separate item shall be scheduled in the following agenda of the ordinary general assembly meeting regarding the CPMSs provided in favor of third parties and the income and benefits obtained due to the provision of CPMSs
There may be CPMSs provided by the corporation before going public, which are not compliant with the CG Communiqué. In this case, the CG Communiqué has provided a transition period. Accordingly, existing CPMSs that are contrary to the CG Communiqué must be reduced to zero level by the end of the fourth year following the year in which PLC shares begin to be traded on the stock exchange.
Material Events Disclosure
The purpose of the II-15.1 Communiqué on Material Events Disclosure (ME Communiqué) issued by the CMB is to ensure that investors are informed on time, fully and accurately, and to ensure that the capital markets operate in a reliable, transparent, effective, stable, fair and competitive environment and to regulate the procedures and principles regarding the disclosure of information, events, and developments to the public. Inside Information is defined in the ME Communiqué as information, events, and developments that have not yet been disclosed to the public that may affect the value, and price of capital market instruments or the investment decisions of investors. Except for certain exceptional circumstances, it is regulated that Inside Information must be disclosed to the public.
CPMSs should also be evaluated in this context. The ME Communiqué contains broad regulations as principle regarding the qualification of Inside Information, and the same Communiqué art. 27 states that the CMB is authorized to prepare a guide to provide and public a guide for the disclosures within the scope of the ME Communiqué. CMB has issued a guide on this subject[3] (Material Events Guide, Guide). It is stated in the Guide that this Guide has the force of a Board decision.
In the fifth section titled "Inside Information Subject to Disclosure Obligation", where inside information subject to disclosure obligation is evaluated, it is stated that the Guide cannot cover all that needs to be disclosed, that the ones included are examples and that those who are obliged to disclose must evaluate their disclosure obligation within the framework of the available data and conditions specific to the corporation. The Guide therefore states that each situation should be considered individually.
In section 5.8 titled Changes in the Financial Structure of the Issuer, examples that could be considered in the evaluation of Inside Information on this subject are listed. In the fourth paragraph of the said section, "The sum of the collaterals, pledges, mortgages and sureties given by the issuer (excluding banks) within the framework of the Board regulations; reaching 10% or multiples of the total assets in the last publicly disclosed balance sheet" is among the criteria that could be taken into consideration when evaluating an Inside Information that should be disclosed to the public. In the example in question, no distinction is made regarding who the CPMS is issued for.
In this case, if the amount of CPMS provided exceeds the thresholds in the example, PLC should consider making a PDP statement.
Conclusion
TTK does not contain special provisions for CPMS facility. The subject is regulated in detail in the CG Communiqué regarding PLC. In this context, when a PLC providing CPMS, it must comply with the pro visions herein. Providing CPMS in favor of persons other than those included in the CG Communiqué and without complying with the procedures in the CG Communiqué will constitute a violation of the legislation. CPMS established before going public that are not complying with the conditions in the CG Communiqué must be reduced to zero level by the end of fourth year following the first year of trading on the stock exchange. In addition, evaluation of public disclosure of CPMSs on a case-by-case basis is also an issue that needs to be considered.
- Pursuant to the sixth paragraph of the provision, the provisions of this article do not apply to guarantees, pledges, mortgages and guarantees given by investment trusts, banks and financial institutions in favor of third parties.
- It should be noted at this point that group company is not a clearly defined concept. There are definitions and concepts that may affect the concept of group company both in the TCC , in the Capital Markets Legislation, and in the Turkish Accounting Standards to which the Capital Markets Legislation refers on these and similar issues. Since clarifying the scope of the group company definition exceeds the purpose of this study, it is not entered into detail here.
- Capital Markets Board, Material Events Guide (Access date 07.01.2024)
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