Articles between 379 and 389 of the new Turkish Commercial Code No. 6102 ("TCC") regulate company acquisition of own shares (also known as share repurchase or share buybacks) and company pledge of own shares which were not allowed by the former Turkish Commercial Code No. 6762. With the enactment of the TCC, the companies' right to acquire and pledge of their own shares have been recognized in a limited manner.
In light of the new provisions of the TCC, a joint stock company may acquire or pledge its own shares under the below mentioned conditions.
I. Company Acquisition or Pledge of Own Shares By the Resolution of the General Assembly of Shareholders
Article 379 of the TCC regulates the conditions for a joint stock company to repurchase or pledge its own shares.
Within this context;
a. The total nominal value of the repurchased or pledged shares shall not exceed one tenth of the share capital or issued capital of the company.
b. The general assembly of shareholders shall adopt a resolution to authorize the board of directors (the "BoD") in order to repurchase or pledge the company's own shares within the abovementioned limit. In its resolution, the general assembly shall state the nominal value of the shares to be repurchased or pledged, the lower and upper limits of the share price and the duration of the authorization granted to the BoD. The BoD may be authorized to repurchase or pledge company's own shares for a maximum period of 5 (five) years. Additionally, the general assembly shall decide the ratio of the shares which may be acquired or pledged by the company; however, such ratio cannot exceed one tenth of the share capital or issued capital of the company. The board of directors, on the other hand, is obliged to state in each of its authorization requests that the legal requirements for the share repurchase or pledge have been met.
c. The remaining net asset of the company following the deduction of the repurchased share price shall be at least the sum of the share capital or issued capital and the reserve funds not to be distributed according to the TCC and the articles of association. In other words, the share capital or issued capital of the company and the reserve funds which have to be kept in accordance with the TCC and the articles of association shall not be used for the repurchase of the shares. The company should acquire its own shares through its freely disposable assets. Otherwise, Article 480/3 of the TCC which prohibits the return of capital to the shareholders is deemed to be violated. Also, as per Article 520 of the TCC, the company shall set aside reserve fund to cover the costs of repurchasing own shares. This reserve fund will be released in return for an amount covering repurchase costs when the shares are transferred or redeemed. On the other hand, the company is not obliged to set aside any reserve funds for the shares accepted as pledge.
d. The price of the shares to be acquired or accepted as pledge must be fully paid up. This condition is resulting from the capital protection rule and it is also in parallel with Article 388 of the TCC which regulates that the company may not subscribe for its own shares.
As per the same article, above mentioned rules are also applicable when the shares of the parent company are acquired or pledged by its subsidiary. With such provision, the TCC intends to prevent acquisition or pledge of company's shares by its subsidiary by moving around the law and not complying with the abovementioned conditions. Article 380 of the TCC also aims the same by prohibiting the provision of advance funding, loan or security to third parties by the company for the purchase of its shares ("prohibition of financial assistance"); the transactions violating this rule will be deemed null and void.
After the authorization resolution of the general assembly, the BoD shall make a share purchase offer to all shareholders and grant each shareholder the right to sell their shares to the company in proportion to their shares in the company's capital. Any unequal implementation of acquiring shares from a specific shareholder or shareholders without any just cause may result in the responsibility of the BoD members.
The shares acquired or pledged by the company according to Article 379 of the TCC do not have to be disposed of; the company may transfer such shares in case of necessity or appropriate conditions. If desired, general assembly may determine in its authorization resolution when and under which conditions the acquired or pledged shares shall be transferred.
On the other hand, the shares acquired or pledged by the company without complying with the conditions of Article 379 of the TCC (e.g. acquiring own shares exceeding one tenth of the capital, shares acquired or pledged without the resolution of the general assembly or inconsistent with the conditions adopted in the resolution of the general assembly, shares not paid from the freely disposable assets of the company or not fully paid up) shall be disposed of or released from pledge within 6 (six) months as of their acquisition or acceptance as a pledge.
Article 386 of the TCC regulates that the shares which are not disposed of despite the unlawful acquisition shall be redeemed by way of capital decrease. In other words, if the BoD could not transfer such unlawfully acquired shares within 6 (six) months, then it must redeem the shares by way of capital decrease. The failure to do so may result in the responsibility of the BoD members.
II. Company Acquisition of Own Shares To Avoid Foreseeable and Serious Loss
According to Article 381 of the TCC, a company may acquire its own shares without a general assembly resolution for authorization, in order to avoid a foreseeable and serious loss to the company.
The preamble of the article lists some examples of foreseeable and serious loss and states that the company may acquire its own shares without the authorization resolution of the general assembly to prevent other groups from taking control of the company or to avoid any sudden or potential decrease in the value of shares at the stock exchange. The foreseeable and serious losses are not limited to the above examples listed under the preamble, but rather will be evaluated for each subject matter. The preamble of the article, on the other hand, describes the "close loss" as direct losses that may have immediate effects and underlines that the concept of "loss" has to be broadly interpreted as to cover the "damages".
If the company acquires own shares by this way, the BoD shall provide written information to the first following general assembly meeting about (i) the reason and purpose of such acquisition, (ii) the number and total nominal value of the acquired shares and how much capital they represent, and (iii) the cost of acquired shares and payment conditions
The shares that are acquired by the company within the legal limits (one tenth of the share capital or issued capital) to avoid foreseeable and serious loss do not have to be disposed of. However, the shares acquired by the company contrary to the abovementioned provisions of the TCC shall be disposed of within 6 (six) months as of the acquisition date; in case of failure to dispose of, such shares should be redeemed by means of a capital decrease.
III. Acquisition in Exceptional Cases
In addition to above mentioned share repurchase alternatives, a joint stock company may also repurchase own shares in case of the following exceptional cases which are listed under Article 382 of the TCC:
a. If the company decreases its share capital or issued capital as to articles between 473 and 475 of the TCC,
b. If the share repurchase is made as a result of universal succession such as merger, spin-off or inheritance,
c. If there is any legal obligation for acquisition arising from the Privatization Law or any other law,
d. If the share repurchase is made to collect receivables of the company from an execution proceeding, on the condition that such shares are fully paid,
e. If the company is a securities company.
The shares, which are acquired as per the exceptional cases under b, c and d and which exceed 10% of the share capital or issued capital, must be disposed of as soon as possible without causing any loss to the company and within 3 (three) years as of their acquisition, at the latest. If the concerned shares acquired in line with the above exceptions do not exceed 10% of the share capital or issued capital, the company does not have to dispose of such shares.
IV. Gratuitous Acquisition
The gratuitous acquisition of own shares by the company or of parent company's shares by its subsidiary is allowed as per Article 383 of the TCC. In other words, the limitations and conditions under Article 379 of the TCC are not applicable for gratuitous acquisitions.
As to Article 384 of the TCC, on the other hand, the gratuitously acquired shares which exceed 10% of the share capital or issued capital of the company must be disposed of as soon as possible without causing any loss to the company and, in any case, within 3 (three) years as of their acquisition.
Finally, it should be noted that the shares acquired by the company in line with or contrary to the TCC will not be considered for calculating the meeting quorum of the general assembly as per Article 389 of the TCC. The same rule is also applicable for the shares acquired by the subsidiary in the general assembly meeting of the parent company. As per the same article, except for the gratuitous acquisition of shares, share repurchase does not grant any shareholding rights. The voting rights and other related rights belonging to the parent company's shares that are acquired by the subsidiary are suspended, as well. The shareholding rights will be reactivated with the transfer of the concerned shares.
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.