Share Buyback of Companies Pursuant to the New TCC
The Turkish Commercial Code numbered 6102, which will come into force on 1 July 2012 (the “New TCC”) has introduced one of the most widely used corporate finance method to The Company Law of Turkey through article 379 and the following articles, constituting an important reform. As of the entry into force of the New TCC, the companies, if they satisfy certain conditions, will be able to acquire their own shares or accept as pledge in exchange for securing a debt. This article shall briefly analyze the current prohibitive measures on share buyback instrument (the term “share repurchase” is also used interchangeably) and the easing off provisions to the stringent rules through the capital markets legislation and then shall focus on the possibility introduced by the New TCC, the conditions of share buyback of the companies and the sanctions for the transactions in violation of the code.
TCC and the Principle Resolution of the CMB
Pursuant to article 329 of the Turkish Commercial Code numbered 6762 (the “TCC”), it is forbidden for the joint stock companies to buy back its own shares in exchange for any consideration or accept pledges thereon. Transactions in violation of this prohibition shall be null and void. This prohibition was intended to shield the structure of share capital, interest of creditors and unequal treatment of shareholders of the companies and aims to prevent inconveniences such as the main shareholder charging its capital market debts to the company and the withdrawal of share capital. Nonetheless, the possibility of the company to protect itself (for example by preventing manipulative share trading and hostile takeovers against corporate raiders by means of greenmailing) through share buybacks is also abrogated by this prohibition[i].
Article 329 exhaustively lists circumstances exceptions to this prohibition. These exceptions are as follows: (i) the share buyback for the purpose of share capital (equity capital) reduction to boost leverage -any money paid to company to acquire share is returned to the shareholder and any relevant shares are cancelled leading to decreased number of shares and increased value for per share earning-, (ii) for the purpose of hedging corporate debt with company receivables other than subscription (equity participation contract), (iii) through total transfer of assets or an establishment; (iv) in the event the ordinary scope of activity of the company is engaging in such buyback transactions, (v) in the event the board members, directors or officers of the company pledge their shares as security for their obligations, (vi)in the event such buyback is made free and not in exchange for any consideration. The shares bought back pursuant to one of these exceptions shall not be represented in the general assembly of the company.
The Capital Markets Boards (the “CMB”) regulated the principles of share buyback for listed companies whose shares are traded on the Istanbul Stock Exchange (the “ISE”) through its resolution dated 10 August 2011 and numbered 26/767 published in the weekly bulletin of the CMB numbered 2011/31. Pursuant to this principle resolution of the CMB, a company whose shares are traded on the ISE may authorize their board of directors for buyback of the shares traded on the ISE, provided that the acquired shares do not exceed 10% of the issues/paid-up share capital and that such shares will be held in its possession for a maximum period of three years[ii]. The assets of the company may not be less than the share capital of the company together with the un-distributable reserves, after deducting the repurchased share price. The resolution regulates the timeframe of the buyback transactions, which situations necessitate public disclosure of special events and the content of such disclosures in detail.
Although this resolution of the CMB enables the share buyback transactions of listed companies on the ISE prior to the entry into force of the New TCC, the validity of this resolution is disputable to the extend that applying resolution would supersede the main legislation. The CMB has permitted a transaction, prohibited by the TCC and not expressly allowed under the Capital Markets Law through a principle resolution. Nevertheless, the regulatory provisions shall be in compliance with the law; and in the event of controversies or inconsistencies, the provisions of law, which has a higher ranking in the norms hierarchy, shall be applicable. Especially bearing in mind that transactions violating the share buyback prohibition under the TCC are null and void, this principle resolution of the CMB is borne to serious problems. There is a risk that the CMB principle resolution constitutes a violation of the TCC other than the exceptions regulated under article 329 of the TCC and the transactions based thereon are null and void[iii].
The New TCC Regime
The New TCC regulates the possibility for a company to buy back its own shares in the article 379 and the following articles. The justification of the New TCC states that the source for these articles was the Second Company Law Directive 77/91 of the European Economic Community. Below isan overview of the situations where the companies may buyback or accept pledges on their shares pursuant to the New TCC.
Pursuant to article 379, a company may buy back or accept pledges on its shares in exchange for a consideration as long as the total amount of offered shares do not exceed 10% ofits share capital or issued capital. Acquisitions made by third persons on behalf and account of the company and acquisitions of subsidiary companies shall be taken into consideration in calculation of this percentage.
The company may authorize the board of directors for a maximum term of five years in order to realize transactions by determining the total number of, total nominal value of and the maximum and minimum amount, which may be paid for such shares[iv]. Thus, the general assembly is granted an opportunity to exercise control on the buyback[v]. After deduction of the repurchased share price, the assets of the company shall be at least equal to the sum of the share capital or the issued capital and the un-distributable reserves pursuant to the law or the articles of association. The repurchased share pursuant to this article must be totally paid up. In order to circumvent any concerns with respect to protection of the capital, article 388 expressly provides that a company may not subscribe to pay its own shares.
Article 381 regulates the share buyback not subject to the general assembly authorization decision, which is one of the conditions under article 379. Pursuant to this article, the board of directors may buy back shares in order to circumvent a serious and probable loss, without an authorization. Nevertheless, the board of directors shall inform the company in the first following general assembly meeting with respect to the purpose of this purchase, total number of shares and total nominal value of the shares bought back as well as their percentage to the share capital, the total amount paid and the conditions of payment.
Under article 382, the exceptional cases where the company may buy back its shares without being subject to the conditions and restrictions set forth above have been regulated, which is similar to article 329 of the TCC. These exceptional cases are the share buybacks of the companies for capital reduction, as a result of transactions involving the transfer of business as a whole, in order to collect a receivable from execution proceedings or levied by security companies.
Lastly, article 383 foresees that a company or its subsidiary will be immune from the tern percent threshold band as long as such purchase is made without paying any consideration (gratuitous).
The New TCC article 389 has a provision similar to the provision in the TCC with respect to the consequences of share buyback of a company on the shareholder rights. Such shares (bought back) shall not be taken into consideration in the calculation of general assembly quorums. Apart from the repurchased shares gratuitously pursuant to article 383, the repurchased shares shall grant no shareholder rights to the company.
In addition to enabling the share buyback of a company, the New TCC introduces the prohibition of financial assistance under its article 380 in order to prevent bypassing the relevant provisions governing buyback. Pursuant to this article, which should be specifically analyzed, a company may not enter into transactions related to providing a prepayment, loan or security to a third persons in order for such third persons to acquire shares of the company; such transactions shall be null and void.
Disposing of the Repurchased Shares
Pursuant to article 329 of the TCC, repurchased shares for the capital reduction shall be immediately cancelled and repurchased shares under other circumstances shall be disposed of in the earliest convenient opportunity. There is no provision, governing disposal of repurchased shares in violation of this provision, as such transactions are deemed null and void. The principle resolution of the CMB regulates that repurchased shares in accordance with this resolution shall be disposed of within three years; whereas repurchased shares in excess of the ten percent threshold band of the share capital must be disposed of within six months.
As per the New TCC, there is no obligation regarding the dispose of all of the repurchased shares as long as the buyback is executed in compliance with law. The obligation of disposal regulated under article 384 is applicable solely to the repurchased shares in excess of the ten percent of the share capital. Pursuant to this article, repurchased shares in the exceptional cases numbered under article 382 (apart from the share capital reduction where the bought back shares are destroyed) and shares gratuitously as per article 383 shall be disposed of in the earliest opportunity which does not result in the company incurring any losses and at the latest within three years.
Article 385 regulates the consequences of share buybacks in violation of the provisions of articles 379 and 381. The repurchased shares in violation of law shall be disposed of, or pledges established thereon shall be removed within six months. Although it has not been expressly regulated under the New TCC, it may be deduced from this article 385 that buyback transactions in violation of law are valid. Contrary to article 329 of the TCC, the New TCC has not contemplated that buyback transactions shall be null and void if they are in violation of the provisions set forth hereinabove[vi]. To the contrary, it has been foreseen that such shares will be disposed of, therefore it has been accepted that a company may acquire its shares by violating these provisions.
Conclusion
The TCC has prohibited and declared the share buyback of companies null and void, save for certain exceptions. It is disputed whether public companies may or may not buyback their shares traded on the ISE as per the principal resolution of the CMB dated 10 August 2011, would involve share buyback prohibition set forth under the TCC.
The New TCC has introduced an important reform by enabling the companies to buy back its shares through authorizing its board of directors for acquisition of shares not in excess of 10% of the share capital. Furthermore, the board of directors may realize such transactions without any authorization in the eventthere is a risk of a serious and probable loss to be incurred by the company. The possibilities for the company to buy back its shares in exceptional cases such as capital decrease or total transfer of assets or gratuitous acquisitions have been preserved.
As it has been discussed in detail above, to cope with any loophole breakdown of share buyback provisions, financial assistance in acquisition financing transactions has been prohibited and nullity and voidance of such transactions have been taken along subsequently.
[i] See Prof. Dr. Ünal Tekinalp, Yeni Anonim ve Limited Ortaklıklar Hukuku ile Tek Kişi Ortaklığının Esasları, 2. Bası, İstanbul, 2011, par. 9-18 to 9-21; Dr. Alihan Aydın, Anonim Ortaklığın Kendi Paylarını Edinmesi, İstanbul, 2008, p. 66 onwards, for the advantages and disadvantages of share buybacks.
[ii] It may be seen that the CMB has taken the draft of the new TCC as a basis to this principle resolution. Please see Yrd. Doç. Dr. Hayrettin Çağlar, Türk Ticaret Kanunu Tasarısına Göre Anonim Şirketin Kendi Paylarını İktisap Etmesi, Kazancı Hakemli Hukuk Dergisi, www.doktrinbank.com for further details.
[iii] Please see Prof. Dr. Veliye Yanlı, Doç. Dr. Gül Okutan, Şirketin Kendi Paylarının İktisabına İlişkin 10.08.2011 tarih ve 26-767 sayılı SPK İlke Kararının 6762 Sayılı TTK Çerçevesinde Değerlendirilmesi, 10 Şubat 2012, Arslanlı Bilim Arşivi, www.arslanlibilimarsivi.com stating that the CMB principle resolution is in violation of the law to the extend it exceeds the scope of the provision under article 329 of the TCC and that the share buyback transactions shall be null and void and acquisitions of third parties acting in good faith shall not be preserved.
[iv] The justification of the article further states that the general assembly may delimit the authorization for entering into buybck transactions to a specific cause.
[v] Prof. Dr. Ünal Tekinalp, ibid., par. 9-29.
[vi] See Dr. Alihan Aydın, ibid., p. 313 onwards for discussions on the consequences of violating the mandatory provisions under article 379 and the following articles.
All rights of this article are reserved. This article may not be used, reproduced, copied, published, distributed, or otherwise disseminated without quotation or Erdem & Erdem Law Firm's written consent. Any content created without citing the resource or Erdem & Erdem Law Firm’s written consent is regularly tracked, and legal action will be taken in case of violation.
Other Contents
The Turkish automobile and light commercial vehicle market left the 2000s behind with steadily rising sales figures and the 2010s with high and stable sales figures as well. In this period, the growth of the market was driven not only by high purchase power but also by easy access to credit and product diversity...
Turkish Commercial Code No. 6102 ("TCC") provides the right to exit from the company to the shareholders of limited liability companies and the right to squeeze out the shareholder from the company, unlike the structure of joint stock companies, with the exit and squeeze out institutions specially regulated for...
Turkish Commercial Code No. 6102 (“TCC”) preserves the rule that the board of directors shall manage and represent joint stock companies. The TCC regulates how the power of representation shall be exercised, the registration and announcement of the persons authorized to represent, the transfer of the...
Ordinary partnerships are regulated under Turkish Law between Articles 620 and 645 of the Turkish Code of Obligations No. 6098 (“TCO” or the “Code”). The Law defines an ordinary partnership contract as a contract where two or more persons undertake to combine their labour or property to achieve a common...
Merger and acquisition processes are one of the legal processes that most seriously affect the identities and legal status of companies. After the completion of legal, tax, financial and operational due diligence reports, the parties initiate the negotiation process in case they reach an agreement on proceeding with the...
A popular business model for expanding market reach and brand recognition worldwide is franchising. Despite being less common than distribution agreements in the form of mono-brand store agreements, franchising is another significant method for extending luxury brands' distribution networks. Luxury brands use...
In the decision dated 14.06.2022 and numbered 2019/149 E. 2022/894 K., the Court of Cassation General Assembly (“CCGA”) evaluated the theory of piercing the corporate veil in the context of the relationship between the guarantor and the borrowing company in a dispute arising from a loan agreement...
The European Union continues to be an important investment center for foreign investors. According to data from the European Commission's "Second Annual Report on the monitoring of foreign direct investment in the European Union", the European Union received €117 billion worth of foreign direct investment in...
Transfer of shares is arguably the first legal transaction that comes to mind among the legal transactions regarding the shares of a capital company, and the most common transaction in practice. However, the shares of a capital company may also be subject to various transactions, other than share purchase...
Law No. 6563 on the Regulation of Electronic Commerce (E-commerce Law or Law) has recently undergone a radical change in order to regulate the behavior of the players in the rapidly growing and developing e-commerce sector. The new regulations that came into force as of January 1, 2023 envisage important...
On 11 June 2021, the German Federal Parliament approved the German Supply Chain Due Diligence Act (Lieferkettensorgfaltsgesetz) (“Act”) which affects not only German entities but also their suppliers in foreign countries (including Turkish entities). The main focus of the Act, which entered into force on...
On 21 December 2007, the Federal Council approved the draft revision of the Swiss Code of Obligations, which also includes amendments to company law. On 28 November 2014, the Federal Council referred the draft revision for consultation. Following extensive discussions and a long enactment process, the...
The Turkish Commercial Code No. 6102 ("TCC") regulates maritime trade contracts under the fourth part of the fifth book of the Code. Among the types of contracts regulated in this section, the most frequently used contract in international maritime transport practice is the freight contract regulated under...
Prohibition on hidden income shifting is one of the most important issues that is broadly regulated under Capital Markets Law No. 6362 (“CML”). In conjunction with CML Article 21, which has a broader context than Article 15 of the abrogated Capital Markets Law No. 2499, another significant step has been taken...
As a result of developing commercial activities and large-scale investments, especially concluded in the fields of construction, energy and mining, companies are seeking to participate in these investments by uniting their powers and expertise to take advantage of financial opportunities together. This tendency...
The Turkish Commercial Code (“TCC” or “Law”) has enabled companies to apply different structural models and to implement new legal formations by including spin-off provisions to its Article 159 et seq. In accordance with the provisions of the law, companies may transfer a certain element, or elements, of their...
The International Federation of Consulting Engineers is a professional association established in 1913, known as the FIDIC (Fédération Internationale Des Ingénieurs-Counseils). Its members are duly elected from consultant-engineer associations of various countries, and membership to the association is...
Incoterms are a set of rules introduced by the International Chamber of Commerce (ICC) to explain the commercial terms that are widely used in international trade. The purpose of Incoterms rules is to facilitate and expedite international trade in a safe and secure manner...
The regulation applicable to all Turkish ports prepared by the Ministry of Transport, Maritime Affairs and Communications that entered into force after being published in the official gazette on October 31, 2012 (˝the Regulation˝), consolidates all the bylaws, regulations and instructions in a single Regulation...
As a rule, rights and obligations arising from an agreement have legal consequences only between the creditor and the debtor which are parties to the agreement. This principle is referred to as "privity of contract." In general, contracts for the benefit of third parties, where the fulfillment of an...
The rules of e-commerce, which grow and develop with the digitalizing world, are changing. E-commerce has become the driving force of the digital economy. However, considering the growth rate of e-commerce and the transformation it has undergone in a short time, it is obvious that some...
The dissolution of a company is a specific type of dissolution, which results in the cancellation of the legal personality which was gained by registration at incorporation. The specific proceeding which leads to the dissolution, and thus, the termination of a company upon the constitutive decision...
Companies in which shares or authority to manage is held by members of a family are considered to be “family businesses”. Family members can hold shares that control the company, as well as retain management authority. Having a family business means opportunity, security and income for...
Turkey ratified the Convention on the Contract for International Carriage of Goods by Road (“CMR”) in accordance with Act No. 3939 dated 7 December 1993, and the CMR entered into force in Turkey on 31 October 1995. In accordance with Article 1 / 1 of the CMR, the carriage of goods by road...
Ordinary partnerships are governed by Article 620 et seq. of the Turkish Code of Obligations No. 6098 (“TCO”). An ordinary partnership agreement is defined as an agreement whereby two or more persons undertake to join efforts and/or goods to reach a common goal...
The concept of disguised profit transfer in joint stock companies, in its broadest meaning, covers the transfer of company assets to related parties and may occur in different ways. This concept is regulated in detail under capital markets legislation...
Share subscription agreements, which are commonly encountered in start-up investments, set out the terms and conditions of an investor’s participation in a company as a shareholder by subscribing the new shares issued in a capital increase...
The electronic signature, which has the same legal consequences as wet signatures if it meets certain conditions, has taken its place in many legal systems and has enhanced commercial life. Although there are various types and applications in different legal systems...
INCOTERMS are a set of rules introduced by the International Chamber of Commerce (ICC) to explain the commercial terms that are widely used in international trade. The purpose of the Incoterms rules is to contribute to and facilitate the safe and swift conduct of international trade...