Turkey: Share Buybacks Under The New Turkish Commercial Code

The purchase by a company of its own shares is generally referred to as a "share buyback." Companies follow this process in order to reduce the number of their shares in the market. The two main reasons that companies may elect to reduce their shares in the market are: (i) increasing the value of shares still available; and (ii) eliminating any threats by shareholders who may be looking to hold a controlling stake.

Although share buybacks are allowed in many common law countries along with many European Union countries since the mid-1970s, share buybacks are generally prohibited under the currently applicable principles of Turkish law. However, New Turkish Commercial Code No. 6102 that was enacted on 13 January 2011, and which will be effective from 1 July 2012, allows for share buybacks by companies under certain conditions.

i. System Under Currently Applicable Turkish Commercial Code

Although there are other specific regulations that may be applicable depending on the nature of the company in question, the main legislation regulating share buybacks is currently the Turkish Commercial Code - Law No.6762 (the "TCC"). According to the TCC, save for a few exceptions, companies are prohibited from acquiring their own shares. The following situations are listed as exceptions of this principle under Article 329 of the TCC, and share buybacks are temporarily permitted and not deemed void in these instances: (i) buyback based on the capital decrease of the company; (ii) company acquiring its shares in consideration of its receivables arising from a debt that was incurred other than due to the subscription of share capital; (iii) company indirectly acquiring its own shares by way of the transfer of an estate or business that holds its shares; (iv) purchase or pledge of shares being a part of the scope and objective of the company; (v) company pledging its own shares as collateral in exchange for the obligations of its directors, managers and/or officers; and (vi) company acquiring its own shares free of charge.

In the event that any of the above-stated exceptional circumstances exist, the company in question may acquire its own shares for a temporary period of time. Although Article 329 of the TCC is silent on how long such temporary period of time may be, the company is still obliged to dispose of these shares within the shortest time possible.

As a consequence of a share buyback, it should be noted that the rights attached to such shares cannot be exercised by the general assembly of shareholders. Therefore, the buyback shares shall not be taken into consideration during the calculations of meeting and decision quora at general assembly meetings.

Any agreement of the parties contrary to Article 329 of the TCC as stated above shall be considered void. Also, failure to comply with such principles may lead to the liability of the members of the board of directors of the company in question and the shareholders whose shares have been transferred in violation of the prohibition.

ii. System Under New Turkish Commercial Code

The new Turkish Commercial Code (the "New TCC") generally enacts the principles regulated under the Second Council Directive of European Economic Community numbered 77/91 regarding share buybacks. Similar to Article 19 of the said Directive, share buybacks are allowed under certain conditions. For instance, the board of directors should be authorized by the general assembly, which authorization should include the terms and conditions of such acquisition (the maximum number of shares to be acquired, the duration of the period for which the authorization is given, and the minimum and maximum amount of consideration, etc.). In accordance with the above mentioned Directive's requirements, the New TCC determines the upper limit for share buybacks at 10% of a company's basic or issued capital.

a – Joint Stock Companies

Under the New TCC, share buybacks of joint stock companies are allowed subject to certain conditions as stated in paragraph 1 of Article 379. A company may not acquire and accept its own shares as a pledge in return for a consideration that exceeds, or will exceed, as a result of a transaction, 10% of its basic or issued capital. It is further noted that such restriction will also apply to shares that a third party acquires or accepts as a pledge in his/her name, but on account of the company.

Another requirement regulated under the New TCC is the authorization of the board of directors by the general assembly to approve share buybacks or the pledges over the company's own shares. This authorization may only be granted for a specific period of time. The New TCC stipulates the maximum period for such authorization as five years. The lower and the upper limit of the amounts that may be paid for shares to be acquired, and the total nominal value of the shares to be acquired or accepted as a pledge, must be stated in the authorization. The board of directors must also state in each of its requests for authorization from the general assembly that all legal requirements for the share buyback have been met.

Share buybacks must not cause a reduction in the company's net assets under the sum of: (i) the company's reserves that are not allowed to be distributed according to law and the company's articles of association; and (ii) the company's basic or issued capital, calculated after the cost of the shares to be acquired are deducted from the company's net assets.

Share buybacks are only allowed for shares, the amounts of which have been fully paid.

The acquisition of a parent company's shares by its subsidiary company is also considered as the acquisition of a company's own shares under the New TCC and, therefore, fulfi llment of the abovelisted criteria is also required for such transactions. The New TCC regulates, in Article 382, six exceptional situations in which the above principles are not required to be adhered to:

(i) Buyback is made through the application of Articles 472-475 of the New TCC that regulate share capital decrease;

(ii) Buyback is made as a result of universal succession (külli halefi yet);

(iii) Buyback is made by virtue of a legal obligation for acquisition;

(iv) Buyback is made with the intent of collecting the receivables of the company through an execution proceeding, provided that the concerned shares are fully paid;

(v) The company is a securities company; or

(vi) Buyback is made gratuitously, provided that the concerned shares are fully paid.

According to Article 381, if the share buyback is required in order to avoid an imminent and serious loss to the company, then the company in question is entitled to acquire its own shares in the absence of a general assembly resolution for authorization, although the other requirements remain. However, the board of directors is obliged to provide, at the next general assembly, and in writing, the reason and the purpose for the share buyback, the number of shares acquired, the total amount of the concerned shares' nominal values, the percentage of the capital they represent, and the price and terms of payment. Although share buybacks are allowed by the New TCC under certain circumstances, according to Article 384 of the New TCC, companies are still not entitled to hold such shares permanently, unless the total amount of these shares owned by the company and the subsidiary company exceeds 10% of the company's basic or issued capital. The acquired shares must be disposed of as soon as possible after their transfer is effected without causing any loss to the company and, in any event, within three years from their acquisition. Such disposal is not required for share buybacks occurring as a result of a share capital decrease and for share buybacks by securities companies.

If the shares are acquired or accepted as a pledge in breach of the above principles, such shares must be disposed of, or such pledge must be released, within a period of a maximum of six months commencing from the date of their acquisition or acceptance as a pledge. If the shares cannot be disposed of in either of the above two ways, then they must be immediately redeemed through a capital decrease.

The New TCC prohibits the subscription of a company's shares by the company itself. Subscription of a company's shares by a third party, or by such company's subsidiary in its own name but on account of the company, is also considered as a subscription by the company for its own shares. In the event of share subscriptions in breach of the above, the subscribed shares will be considered to be subscribed by the incorporators (if they are effected through the incorporation process) or by the board members (if they are effected through a capital increase process), and the incorporators or the board members, as applicable, will be liable for the cost of the shares.

The New TCC states that except for the gratuitous acquisition of shares, share buybacks do not grant any shareholding right, and such shares shall not be taken into consideration in the calculation of a general assembly meeting quorum.

b – Limited Liability Partnerships

Under Article 612 of the New TCC, share buybacks in limited liability partnerships are not regulated in as much detail as share buybacks in joint stock companies. However, generally, similar principles apply.

A limited liability partnership may acquire its own capital shares, only if it has the necessary equity that may be freely used to purchase them, and if the nominal value of the shares to be purchased does not exceed 10% of the total share capital. This maximum limit of 10% will be increased to 20% in the case of acquisition of capital shares, due to a withdrawal or dismissal from the partnership as provided for in the articles of association, or as a result of a court ruling.

Capital shares acquired in excess of 10% of the share capital of a partnership must be disposed of or redeemed through a capital reduction within a maximum period of two years.

Limited liability partnerships are required to allocate reserves in an amount equal to the amount paid for the acquired capital shares.

Parallel to the regulations concerning joint stock companies, voting rights and the other rights attached to the capital shares subject to the buyback are suspended for the period that such capital shares are in the possession of the partnership.

Supplementary and related payment rights attached to the acquired capital shares cannot be demanded during the period that such capital shares are in the possession of the partnership.

The limitations applicable to a limited liability partnership's acquisition of its own shares shall also be applied in the event of acquisitions of a partnership's shares by a subsidiary in which the majority of the shares are owned by the concerned partnership.

In light of the foregoing, it may be concluded that while the current TCC generally prohibits share buybacks in principle, and allows this process only in exceptional cases, the New TCC allows for a more permissive approach.

The new regulations concerning share buybacks are generally in harmony with the European Union's directives and intend to prevent trading companies from causing undue damage to shareholders through manipulative transactions.

The new regime regarding share buybacks remains to be tested following the New TCC's entry into force on 1 July 2012.

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.

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