In accordance with Article 28 of the Capital Market Law No. 6362 ("Capital Market Law"), in the event that (i) a public company incurs loss for five years in a row and (ii) there was not any reasonable or compulsory ground behind the loss that might be linked to the company's activities, the privileges that are granted to certain shares, through share groups, regarding "right to vote" and "right to be represented in the board of directors" can be abolished by the Capital Markets Board ("CMB"). However, if the shares granted with the privileges are held by public institutions and organizations, the foregoing article does not apply for their shares.
According to preamble of Article 28, the reason of this article is to protect other shareholders and investors that hold ordinary shares and are not able to take part in the management of a public company, and to urge the shareholders having privileged (preferred) shares to appoint more competent and efficient directors/executives for the benefit of the company and all the shareholders. Such article also aims to prevent unlimited dominance of family members on family-owned companies offered to the public to a certain extent.
In order to elaborate implementation path of Article 28 of the Capital Market Law, the CMB has introduced the Communiqué on Principles of Abolishing the Privileges regarding Right to Vote and Right to be Represented in the Board of Directors (II-28.1) on January 10, 2020 ("Communiqué") with immediate effect. Considering that the Capital Market Law has entered into force as of December 30, 2012, the Communiqué could have been introduced over the past eight years.
The Communiqué is mainly in line with Article 28 of the Capital Market Law. On the other hand, the novel principles and clarifications stipulated with the Communiqué could be briefly explained as follows:
- The five-year period begins with the next fiscal year upon becoming a public company;
- If the company is publicly held since effective date of the Capital Market Law (i.e. December 30, 2012) and subject to ordinary fiscal year (January 1 - December 31), the five-year period begins with the fiscal year ending December 31, 2013;
- If the company is publicly held since effective date of the Capital Market Law (i.e. December 30, 2012) and subject to private fiscal year, the five-year period begins with the private fiscal year ending in 2014;
- The financial statements, which have been audited and disclosed to public, must be taken into consideration in order to detect whether the company made loss or not;
- For the public companies that are required to prepare consolidated financial statements, these financial statements are taken into account rather than the solo financial statements;
- A public company which incurred loss for five consecutive years must notify the reasonable or compulsory ground(s) behind the loss that might be linked to the company's activities (if any) to the CMB within twenty business days upon disclosure of the latest financial statements (i.e. belonging to the fifth financial year);
- The reasonable or compulsory ground(s) should be substantially related to the incidents that were out of the public company's control and affected the whole economy, sector where the company operates in or the company itself;
- In the event that the CMB is decided to abolish the privileges regarding right to vote and right to be represented in the board of directors in a public company, these privileges shall be no longer be used as of the decision date;
- The CMB also informs the Central Securities Depository Institution ("MKK") and the Ministry of Trade to ensure proper implementation of its decision;
- Following the abolishment decision taken by the CMB, the company must apply to the CMB within two months to obtain the CMB's consent on removal of the privileges from the articles of association and making necessary amendments therein;
- If the CMB approves amendment of the articles of association in parallel with the abolishment decision, accordingly the amendment must be included in the agenda of the upcoming general assembly meeting to be held;
- If the company does not apply to the CMB within two months or include amendment of the articles of association as approved by the CMB in the agenda of the general assembly meeting, then the CMB compels the company to include amendment of the articles of association in the agenda;
- In the general assembly meeting, the shareholders must resolve on removal of the privileges in line with the CMB's abolishment decision and update the articles of association;
- If certain shareholders acquire the management control of the company as a result of the abolishment decision taken by the CMB and due to the fact that they have already had more than 50% of the current voting rights, such situation does not trigger mandatory takeover bids.
In light of the above, it could be inferred that unless there was a reasonable or compulsory ground behind a public company's continuous loss for five years in a row, the CMB deems this situation as board of directors' failure and therefore it aims to diminish effects of real person and private entity preferred shareholders on election of the board of directors.
This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in June 2020. A link to the full Legal Insight Quarterly may be found here
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.