Turkey: Innovative Structures

Yalçın Özge Okat of Pekin & Pekin examines new challenges for acquisition financing in Turkey following the introduction of the new commercial code

Following the introduction of the new Turkish Commercial Code (TCC) on July 1 2012, certain changes to the legislation have called for innovative transaction structuring by Turkish lawyers.

The new TCC has ignited discussions about the provisions on the prohibition of financial assistance and their effects on acquisition financing transactions. The new provisions of the TCC will be interpreted by the courts in the near future, and supreme court decisions may play a critical role in the application of the TCC and the financial assistance prohibition brought by this law.

Article 380/1 of the TCC prohibits legal transactions with a subject matter of the provision of an advance, loan or security, conducted by a company with another person for the purpose of the acquisition of its own shares. Such transactions will be null and void.

In acquisition financing transactions, the acquirer borrows funds from other parties in order to purchase the shares of the target company. In such transactions, the acquirer may borrow from the target company, especially in cases where cash or liquid assets exist in the company, or receive a loan from a bank or a group of banks. If bank loans were to be in place, banks have to be satisfied by provision of various securities. The acquirers may prefer to use the assets of the target company as securities, in addition to or instead of their own assets, and the flexibility of the acquirer for using the assets of the target company may play a significant role in acquisition financing transactions.

The rationale of Article 380/1 indicates that the phrase "with a subject matter of the provision of an advance, loan or security" should be interpreted in the broadest manner as involving any kinds of such transactions. In this manner, mortgages, commercial enterprise pledges, pledge of receivables, share pledges, guarantees, sureties and any other types of securities will fall under the scope of such clause.

Transactions out of the scope of prohibition

Article 380/1 imposes restrictions on the target only, and not the acquirer. Securities granted by the acquirer from its own assets will not be null and void. In this regard, it should be noted that, as a result of the acquisition transaction, the acquirer will be the owner of the shares of the target company. The acquirer can, therefore, pledge such shares to the bank.

In addition, the TCC article involves two exceptions to the general restriction and stipulates that the prohibition will not apply to transactions that fall under the subject matter of business of the credit or finance institutions (banks or financing companies, for example), and are conducted for the acquisition of the shares of the target company by the employees of the target company or its subsidiaries. The first exception would be applicable if the target is a credit or finance institution. Although a broader interpretation of this exception is sometimes discussed, considering the wording of article 380/1, it does not seem easy to argue that the exception would be a real safe harbour for lenders. The second exception is, as indicated in the rationale of the article, provided for the facilitation of the acquisition of the shares of the target company by its employees. Both exceptions are applicable unless such transactions do not reduce reserves of the target companies below certain levels as indicated in article 380/1.

Purpose, form and timing

For an advance, loan or security transaction to fall under the scope of the prohibition, it must be conducted for the purpose of the acquisition of shares of the target company. A formal agreement is not necessary between the target company and the relevant party. The transactions will fall under the scope of such prohibition regardless of whether the transaction is conducted previous or subsequent to the acquisition, as indicated in the rationale.

Public companies

Public companies are also subject to article 380/1. In addition, pursuant to a Principle Decision of the Capital Markets Board of Turkey (CMB), dated September 9 2009 and numbered 28/780, a listed company may grant securities, pledges and mortgages: (i) in its own name; (ii) on behalf of the companies subject to full consolidation with itself; and (iii) to third parties, provided that such securities, pledges and mortgages are granted to third parties for the purpose of conducting their ordinary course of business.

This Principle Decision does not allow public companies to grant securities to their parents other than for the purpose of conducting their ordinary course of business. The directors of the target will be responsible and an administrative fine of the CMB will be applicable upon a breach of the Principle Decision. This rule works as an additional restriction for the provision of securities, in acquisition financing of transactions where the target is a public company.

Case by case review

In practice, many deals involve international parties and based on the different needs of lenders, acquirers and target companies, various models are discussed. Some cases involve mergers or strings of companies. Such models should be reviewed on a case-by-case basis, keeping in mind that courts may have a tendency to interpret the article in the broadest manner: the rationale of article 380/1 indicates that the article aims to circumvent article 379, which restricts the acquisition of a company's own shares. The heading of article 380/1 is "fraud against law" (headings of the TCC form part of the text of the articles pursuant to article 1534/1).

Be creative

Acquisitions play an important role in the efficiency of the economy. In many cases they are a great way of attracting foreign capital. Some acquisition financing models would, however, not be applicable in view of article 380/1 and the value expected from this regulation may be argued to be lower than its negative effects on acquisition financing transactions.

In this regard, it should be noted that article 23 of EU Directive 77/91/EEC of December 13 1976, from which article 380/1 of the TCC was derived, was changed by Directive 2006/68/EC of September 6 2006. The new version of article 23 of the EU Directive allows such transactions to be conducted in case certain conditions (such as the approval of the general assembly) are met.

It would seem wise for policy makers to review the effects of article 380/1 on the market and consider making necessary amendments on the article in line with the updated version of article 23 of the EU Directive.

This article first appeared in IFLR's Turkey Report 2013.

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