Turkey: Squeeze Out Right: Two Laws, Different Rules

The "squeeze out right", which has a longstanding presence in the international legal system, has been introduced into Turkish law for the first time with the new Turkish Commercial Code No: 6102 (''TCC''). Along with the TCC, the new Capital Markets Law No: 6362 (''CML''), which was enacted in December 2012, also regulates the squeeze out right for publicly held companies. Since there are fundamental differences between these two regulations, there may be some confusion from a practical point of view.

In this article, first the legal basis for the squeeze out right in Turkish Law will be summarized. Then the basic differences between the CML and the TCC will be analyzed. Finally, potential points of confusion will be evaluated for future consideration.

Article 208 of the TCC which regulates "right to purchase" reads as follows:

"If the controlling company who holds, directly or indirectly, at least 90 percent of shares and voting rights in a joint stock company and if the minority prevents the company from running its business, does not act in good faith, creates perceptible disruption or acts in a reckless manner, the controlling company can purchase the shares of the minority at stock exchange value, if any, or at the value determined in accordance with the method set forth in paragraph 2 of Article 202."

As per the paragraph 2 of Article 202, ''shareholders who vote negatively against the general assembly (''GA'') resolution and had the negative votes recorded in the minutes of this resolution in connection with transactions such as a merger, division, conversion, termination, issuing securities and important amendments to articles of association initiated through an application of control and without any clear reasonable grounds concerning the dependent company, or who have objected in writing to the board resolution on the same and similar subjects, can request from the court that their damages be compensated by the controlling enterprise, or their shares must be purchased at stock exchange value if possible. If no such value exists or if the stock exchange value is not sufficient at actual values, or at a value to be determined in accordance with a method that is generally accepted, the data available at the date nearest to the date of the court order shall be the basis of this determination. The action for claim of compensation or purchase of shares is barred two years after the date of the resolution of the GA or of the date on which the board resolution is announced.''

The TCC requires a two-level test for the application of the squeeze out right. First, the controlling company should hold at least 90 percent of the shares and voting rights. Second, the minority should be preventing the functioning of the company in the ways stated in the relevant article.

According to article 27/1 of the CML, ''in case the shares acquired by way of takeover bids or any other way including acting together to reach the voting right of a publicly traded company at the minimum rate determined by the Capital Market Board (''CMB''), the shareholders who own these shares have the right to squeeze out the minority shareholders. These shareholders can demand from the company the cancellation of the minority shares and the buying out of such shares. The sale price is determined pursuant to article 24 of the CML.''

Under article 24 of the CML, the share price is determined by taking into account the average stock exchange price over the previous 30 days before the declaration of squeezing-out is made to the public.

Furthermore, as per article 27/3 of the CML, article 208 of the TCC with respect to ''right to purchase'' is not applied to publicly traded companies.

While the TCC stipulates that at least 90% of both shares and voting rights must be held by the controlling company in order to have the squeeze out right, under the CML this right can be used only if the voting rights exceed the ratio determined by the CMB. Accordingly, as per the CML, the shareholding ratio has no significance in terms of the squeeze out right. Reaching the voting right ratio to be determined by the CMB is sufficient to use the squeeze out right regardless of the shareholding ratio. In practice, this would create adverse effects, especially for the majority shareholder(s) who have a minority of the voting rights at general assembly meetings. For example, assume that Group A shareholders in a publicly traded company hold 92% share capital, but these shareholders have 8% voting right in the company. On the other hand, Group B shareholders who hold 8% share capital of the company have the privilege of voting rights (i.e., 92%) in the company. In such a case, if Group B shareholders are considered the majority shareholders simply because they have the majority voting rights and can benefit from the squeeze out right against the Group A shareholders who hold 92% share capital of the company, the regulation would have adverse effects in practice, in terms of rights of minority shareholders. In this regard, the prospect of secondary legislation is expected to include the necessary mechanisms to ensure the protection of the rights of small investors.

There are certain pre-conditions for the exercise of the squeeze out right under article 208 of the TCC, such as preventing the company from running its business and not acting in good faith by the minority shareholder(s). Yet under the CML there is no pre-condition for the squeeze out right besides reaching the voting right ratio to be determined by the CMB.

However, the CML states that the squeeze out right can be used ''if the shares acquired by way of takeover bids or any other way, including acting together, reach the voting right of the publicly traded company at the minimum rate determined by the CMB''. In this context, there are two points in the CML which differentiate it from the TCC;

• More than one shareholder can aggregate their powers to become the majority shareholder.
• The shareholder can have the required voting right in the GA by way of, for example, buying voting rights or entering into voting contracts.

As there is no prerequisite for the use of the squeeze out right but different shareholders can aggregate their voting rights, the regulations of squeeze out in the CML would result in an emerging market for corporate control in the Turkish corporate world.

Another critical difference between the two laws is about the way to reach the required ratio for the squeeze out right. Under article 208 of the TCC, using the squeeze out right is based on possession of shares since the article includes the expression ''....directly or indirectly, holds at least 90% of shares and voting rights in a joint stock company....''. Furthermore, because the article begins with, ''if the controlling company....'', the ratio is calculated by taking the sum of the shares in the same capital group.

The purchase price determination method for the minority shareholder(s)'s shares under the CML is different from the method stated under article 208 of the TCC.

According to the CML, the purchase price of the minority shareholder(s)'s shares should be the average stock exchange price over the previous 30 days before the declaration of squeezing-out to the public is made. This 30-day period has not been determined as business days or trading days. In this regard, as this period may involve public holidays or days of suspension of trading on the stock exchange, a much shorter period would have to be used for the calculation of the average price, which would not be fair for parties. Besides, the law does not clarify specifically when the squeeze out should be declared, which is essential to determine the start of 30-day period.

On the other hand, in the squeeze-out process under the TCC, the purchase price of the minority shareholder(s)'s shares should be the stock exchange price if the shares are traded on the stock exchange. If they are not, or if the stock exchange price does not correspond to a fair value, then their actual value or the amount determined by the court as per a generally accepted method is used.

On this basis, the TCC expressly requires a more flexible determination method for the determination of purchase price which would protect the rights of the minority shareholder(s).

Under CML, persons who would like to use the squeeze out right shall apply to the companies in a period which will be determined by CMB's secondary legislation. The critical point here is that the dominant shareholders apply to the company which they already control to decide to squeeze the minority shareholders out. As the minority will have no defensive tool on the company level, this would create a conflict of interest between dominant shareholders, the company and the minority. On the contrary, the CML requires minority shareholders for the application of sell out rights to apply to dominant shareholders.

With the introduction of the Turkish Commercial Code and the Capital Markets Law, the squeeze-out procedure has been introduced for both publicly-held companies and non-public companies in the Turkish corporate market, and with these regulations the controlling block in a joint stock company is entitled to forcibly acquire the shares held by the minority block. However as explained in the summary above, there are certain differences between these two regulations. Mainly, the TCC brings strict requirements that must be fulfilled in order to use the squeeze out right while there is no pre-condition besides reaching the voting right ratio to be determined by the CMB under the CML. It is expected that the details of the squeeze out right under the CML will be regulated by secondary legislation, and that many points related to using this right will be clarified.

On the other hand, these regulations impose an obligation on the minority shareholders to sell their shares if the majority shareholders use the squeeze out right. Furthermore, since the purchase price is determined precisely, especially under the CML, the minority shareholders would not have room for rights of objection and defence.

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.