Shareholders in public companies may voluntarily offer to purchase the shares of other shareholders. Nevertheless, under certain circumstances, the controlling shareholder, or the shareholder who acquires control of a public company, is obliged to make mandatory offers to purchase the shares of other shareholders.
Voluntary and mandatory offers are regulated under Capital Markets Law No. 6362 1 ("CML") and Communiqué No. II-26.1 governing Share Purchase Offers2 published pursuant to the CML ("Communiqué"). This newsletter article analyses the share purchase offer within the scope of the CML and the Communiqué.
CML Provisions Governing Share Purchase Offers
Art. 25 CML authorizes the Capital Markets Board ("Board") to determine the principles and procedures of voluntary offers and mandatory offers triggered by material transactions. Additionally, unlike the former and abrogated Capital Markets Law No. 2499, Art. 26 CML introduces a general provision governing triggering events for mandatory offers. Shareholders obtaining shares or voting rights granting them control over the management are obliged to offer to purchase the shares of other shareholders. Thus, in principle, acquiring management control of a public company shall trigger the mandatory offer.
Art. 26 CML specifies the events which confer management control. Accordingly, shareholders (acting individually or in concert with third persons, directly or indirectly) holding more than fifty percent of the voting rights or the right to choose or nominate the majority of the members of the board of directors are deemed to hold management control. Despite the absence of a share transfer, the CML treats obtaining management control through agreements executed between shareholders equally as a trigger event for mandatory offers. Obtaining a majority of the voting rights in the presence of privileged shares granting their holders the privileged right to elect or nominate board members may not however suffice to gain management control. In this case, such share purchases shall not be considered within the scope of Art. 26 CML.
Other Events Triggering a Mandatory Offer
The Board may oblige the controlling shareholders who cause the company to be deprived of a concession related to its scope of activities, or whose license to operate under the Banking Law No. 5411 is revoked, or whose shareholding rights, management and audit is conferred to the Savings Deposit Insurance Fund (Art. 25/4 CML). Similarly, the Board is authorized to request mandatory offers in the event investment companies transform into a different company type (Art. 25/5 CML). Art. 33/4 CML further authorizes the Board to oblige controlling shareholders of public companies who will be delisted to make a mandatory offer.
CML provides for two sanctions in the event the mandatory offer obligation is not respected. Pursuant to Art. 103/3 CML, in the event the Board grants an additional time period, if the shareholder fails to make a mandatory offer when that period lapses, the Board may sanction the shareholder with an administrative monetary fine up to the total price of the shares subject to the mandatory offer. However, the administrative monetary fine, which was also applicable under the former Law No. 2499, was far from being persuasive for companies. Thus, the CML introduced an additional sanction. Accordingly, shareholding rights of shareholders who refuse to make mandatory offers within the time periods determined by the Board shall automatically be suspended and such shares shall be disregarded in calculation of the meeting quorum. This sanction is one of the most important novelties introduced by the CML regarding share purchase offers.
Communiqué Provisions Governing Share Purchase Offers
The Board, as authorized under Art. 25 CML, regulated the principles of voluntary and mandatory offers with the Communiqué. The Communiqué governs share purchase offers generally triggered by obtaining management control. The Communiqué shall not apply to mandatory offers triggered pursuant to Art. 25/1 CML governing material transactions, Art. 26/5 CML on transformation of investment companies or Art. 33/4 CML regarding delisting of public companies (Art. 2 of the Communiqué).
In line with the provisions of the CML, the Communiqué obliges shareholders who assume management control through purchase of part or all of the shares of a public company to make a mandatory offer.
All payments to be made as a result of the share purchase offer must be made in cash and in Turkish Liras. Nevertheless, if the shareholder consents in writing, the payment may also be made through capital market instruments provided that they are traded on a stock exchange. The offering shareholders shall adapt measures to ensure the payment of the entire purchase price of the relevant shares. The Board may require the shareholder to obtain a bank or corporate guarantee for the payment of this price.
The offering shareholder shall, regardless of whether the offer is voluntary or mandatory, apply to the Board with an information form, a sample of which is attached to the Communiqué. This information form shall include various information; including information on the company, the offering shareholder, events triggering the mandatory offer or the underlying causes of the voluntary offer and the conditions of the offer. In the event the information presented in the form are consistent, comprehensible and complete, the Board shall approve the information memorandum. The form shall be disclosed to the public within three business days following the approval by the Board. However, if it is understood that the information presented on the form are incorrect, misleading or incomplete, the Board is authorized to pause or prohibit the share purchase offer.
The offering shareholder shall sign an undertaking agreement with an investment company. The undertaking agreement shall provide the information specified in the Communiqué, including information on the shares subject to the offer and the price to be paid for such shares.
During the share purchase offer procedure, all material steps, such as the share purchase offer decision, any event triggering mandatory offer, offer price, valuation reports, the results at the end of each offer day and the shareholding and management structure of the company following completion of the offer should be disclosed to the public.
Mandatory Purchase Offer
- Events Triggering Mandatory Offer and Exemption
The Communiqué regulates that, those who obtain management control of a public company, either through share purchases or agreements concluded between shareholders, are obliged to make mandatory offers to other shareholders. The mandatory offers must be unconditional.
The Communiqué repeats Art. 26 CML, which explains the cases where a shareholder is deemed to have obtained management control, and provides for additional explanation. In determining which actions amount to "acting in concert", real person shareholders are deemed to act in concert with companies under his/her control, and legal entity shareholders are deemed to act in concert with persons controlling themselves and other companies under the same control. The Communiqué also regulates the events where a mandatory offer shall not be triggered. The acquirer of controlling interest shall be exempt from making a mandatory offer if:
- Management control is obtained as a result of a voluntary offer;
- Management control is obtained through agreements between shareholders, approved by the general assembly of the public company, and provided that shareholders who vote against such approval are granted exit rights;
- The shareholder holding controlling interest transfers shares such that his/her shareholding decreases below 50%, and without losing management control, regains a shareholding above 50% through share transfers; or
- Shares are transferred between members of the same group holding controlling interest in the public company.
Furthermore, the Board may, at its discretion, declare that certain cases, such as mandatory changes in and the restructuring of the shareholding structure, or acquiring control of a holding company without the purpose to acquire the control of its subsidiary public company, shall be exempt and shall not trigger the mandatory offer procedure.
- Time Periods and Sanctions
The acquirer of controlling interest shall apply to the Board within six business days following their share acquisition, together with the information form and the documents specified in the annexes of the Communiqué, to make a mandatory offer. The offer should commence within two months following the realization of a triggering event and within six business days following the approval of the information form by the Board, and remain open for at least ten and at most twenty business days.
The shareholder must apply for exemption, if applicable, within this six-day period following the mandatory offer triggering event. If an application for exemption is filed, in the event the Board rejects such application, the offer should commence within one month following the decision of the Board.
Non-compliance with these time periods shall result the suspension of shareholding rights and the shares being disregarded in the calculation of meeting quorums. Furthermore, in the event the Board provides an extension to this period and the shareholder fails to make the offer at the end of this extension, the Board may sanction the shareholder with a monetary administrative fine up to the total purchase amount of the shares in accordance with Art. 103/3 CML. Interest shall also accrue under Art. 17 of the Communiqué.
- Offer Price
The offer price for mandatory offers of listed companies may not be less than the arithmetic average of the daily weighted average price for a period of six months preceding the public announcement of the event triggering the mandatory offer, or less than the purchase price paid for the purchase of company shares within the six months preceding the mandatory offer. In the event of indirect acquisition of management control, the offer price should also not be less than the price specified in the valuation report to be prepared in accordance with the rules established by the Board. Privileges will be taken into account in determining the price of different share groups. In the event company shares are sold with a price exceeding the offer price during the period between the announcement of the share transfer triggering the mandatory offer and the completion of the offer, the price of the offered shares shall be adjusted and be at least equal to the higher sale price.
- Offer Procedure
Shareholders of public companies may voluntarily make an offer to other shareholders to purchase part or all of their shares. The offering shareholder may withdraw its offer until the commencement of the actual purchase. A shareholder wishing to make a voluntary offer shall apply to the Board together with the information form and other documents specified in the annexes of the Communiqué.
The target company's board of directors shall prepare a report specifying its opinions and its justifications regarding the voluntary offer, and publicly announce this report at least one business day prior to the commencement of the offer.
The time periods governing the voluntary offer are in general similar to that of mandatory offers. The offer should commence within six business days following the Board's approval of the information form and remain open for at least ten and at most twenty business days. In the event shareholders apply for the purchase of their shares in an amount exceeding the total number of shares the offering shareholder is offering to purchase, the shares shall be purchased proportionally from the shareholders.
- Offer Price
The Communiqué does not stipulate a rule for determining the offer price for voluntary offers. Nevertheless, it provides for provisions governing the increase of the price under certain circumstances.
The shareholder making the voluntary offer is free to increase the offer price until one business day prior to the completion of the offer. In such an event, shareholders who have sold their shares and paid the offer price shall pay the increase within two business days after the completion of the offer. If the price is readjusted, the offer period shall be extended by two weeks.
In the event the offering shareholders or persons acting in concert purchase company shares for a higher price within the period from the announcement of the voluntary offer to the public until the lapse of three months after the completion of the offer, the offer price shall be readjusted and increased up to an amount at least equal to the higher price.
A third party may make a competitive offer. In this case, the offer period of the initial voluntary offer may be extended until the completion of the competitive offer. Shareholders who have accepted the initial voluntary offer may revoke their acceptance prior to the payment of the purchase price, if a competitive offer is made after they accepted the initial offer.
The CML provides for general provisions governing voluntary and mandatory offers. It defines events where management control is deemed to be acquired and stipulates trigger events for mandatory offers. Moreover, the CML introduces a new sanction in case of non-compliance with the capital markets legislation governing mandatory offers. Accordingly, in the event of failure to make a mandatory offer in due time, the relevant shareholding rights shall be suspended.
The Communiqué was issued in accordance with and based on these provisions and the authorization granted to the Board. The Communiqué regulates the general principles, the trigger events and specifics of mandatory offers, as well as the principles of voluntary offers. These provisions aim to protect the small investors in public companies and ensure that they are paid at least the price that would be paid for their shares on the market.
1. Entered into force through publication in the Official Gazette dated December 30, 2012 and no. 28513.
2. Published in the Official Gazette dated January 23, 2014 and no.28891, to be effective and enforceable to mandatory offers triggered and voluntary offers made after its entry into force.
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.