The Capital Markets Board ("CMB") issued a new set of rules (Tender Offer Communiqué II-26.1) to govern tender offers targeting shares in Turkish public companies ("New Rules"). The New Rules became effective as of 23 January 2014 and have replaced the CMB Communiqué on Principles Governing Acquisition of Shares Through Tender Offers, numbered Serial: IV/44 and dated 2 September 2009.
The New Rules do not result in a complete overhaul of the regime governing tender offers, yet are introduced by the CMB as an effort to harmonize this area of capital markets regulation with the relevant provisions of Capital Markets Law numbered 6362 that entered into effect on 30 December 2012, and to address certain issues that the CMB encountered throughout the lifetime of the former Communiqué.
Management Control and the CMB's Reaction to the Redington Case
On 29 November 2010, Redington Turkey Holdings S.a.r.l. ("Investor") acquired 49.4% shareholding in Arena Bilgisayar Sanayi ve Ticaret A.Ş. ("Arena"), a company listed with the Istanbul Stock Exchange, whereby the remaining 50.6% was publicly held. The Investor did not make a tender offer to the remaining shareholders, presumably believing that a mandatory tender offer was not triggered without having acquired either: (i) ordinary shares vested with 50% or more of the voting rights; or (ii) privileged shares enabling the Investor to otherwise appoint a board of directors' majority. The Investor did not satisfy either prong of the aforementioned test, yet was able to appoint all members of the board of directors, through a de facto voting majority attributable to a significant number of free float shares not participating in the general assembly of shareholders where election of new directors was on the agenda.
A minority shareholder subsequently challenged the fact of a tender offer not being made by the Investor who acquired such de facto control. The CMB rejected this argument on 22 February 2011 and the minority shareholder filed a lawsuit with the administrative courts to cancel the CMB's ruling with the ultimate goal of forcing the Investor into buying out the minority shareholders at terms no less favorable than those made available to the sellers (i.e., former owners who disposed of 49.4% Arena shares).
On 18 July 2011, the Council of State (the Turkish court of appeals for administrative jurisprudence) issued a stay of execution order, which put the CMB decision dated 22 February 2011 on hold. The CMB then adopted a resolution according to which, regardless of the share percentage, acquisition of the shares enabling appointment of an absolute majority of the board of directors or acquisition of the privileged shares granting the right to nominate such majority of the board of directors at the general assembly of shareholders may be taken into account in order to determine the change in management control. Consequently, the CMB requested the Investor to make a tender offer or to apply for an exemption from doing so. The Investor objected to this ruling and then filed a lawsuit to cancel the CMB's ruling before the administrative court. On December 7, 2012 the administrative court of first instance cancelled the aforesaid ruling. As of today, the case is pending before the Council of State since the CMB appealed the decision on January 24, 2013.
This chain of events led the CMB to address the issue of de facto management control in the new CMB Communiqué governing tender offers.
Article 12(c) of the New Rules states that a de facto position in the general assembly of shareholders granting the ability to appoint a board of directors' majority, does not suffice to conclude that management control is acquired. To be able to argue that management control of a publicly held company is acquired, and thus mandatory tender offer requirement triggered, one would need to establish that: (i) more than 50% (the former communiqué referred to 50% or more in contrast) of the voting rights have been acquired; or (ii) privileged shares granting the right to appoint a board of directors majority has been acquired by the investor or those acting in concert.
New Scenarios Where Mandatory Tender Offer Would Be Triggered
New triggers for mandatory tender offer were introduced by the Capital Markets Law in December 2012. The New Rules mirror these scenarios that first appeared in Article 26 of the Law.
A shift in management control resulting from a contractual arrangement is identified as an event triggering the mandatory tender offer by the New Rules. A shareholders' agreement or voting agreement enabling the party or parties of such agreement to elect or nominate a board of directors majority in a public company would be captured by this provision. Therefore, one may be deemed as having acquired management control, even in the absence of a straightforward change in management control through acquisition of majority shares or privileged shares enabling its owner to elect a board majority. The second paragraph of Article 11 of the New Rules envisages a change in management control by entering into a contractual arrangement where the parties undertake to vote in a particular manner with respect to composition of the board of directors; and/or are granted certain critical veto rights at the board of directors and/or general assembly of shareholders levels.
Other scenarios where a mandatory tender offer would be triggered are also introduced in Article 11 of the New Rules. The CMB is granted discretion to require a mandatory offer being commenced by the controlling shareholder in a public company enjoying a concession, provided the concession is revoked and the controlling shareholder is deemed to have caused such revocation. The CMB is also afforded discretion to protect the minority shareholders against the controlling shareholder where the controlling shareholder is found to have caused the revocation of a public bank's banking license issued under the Banking Law numbered 5411; or where the control of the bank is transferred to the Savings Deposit Insurance Fund for protection of depositors. It would be relatively simple for the CMB to use its discretion to mimic the Turkish banking regulator, the Banking Regulation & Supervision Agency of Turkey (BRSA), on whether the bank failed in the prescribed manner and whether this was caused by the controlling shareholder. It leaves room for broader discretion and therefore debate in the scenario where the CMB will have to assess the significance of a certain concession for the public company's activities and whether the controlling shareholder actually caused the concession being revoked. This resembles the type of judgment typically afforded to courts. One of the principal issues to be resolved by the CMB here would presumably be whether the concessionaire breached its contract or revocation of the concession was an exercise of political discretion by the governmental agency concerned.
Article 14 of the New Rules makes it clear that last six months' weighted average stock exchange trading price will be one of the benchmarks for the mandatory tender offer price under all circumstances, not only where management control changes hands indirectly or through transfer of privileged shares.
One of the notable features of the new legal framework seems to be the robust sanctions applying to delays or outright failure to adhere to the tender offer rules.
Failure to commence a mandatory tender offer is sanctioned by administrative fines up to the aggregate price of shares that would potentially benefit from the mandatory offer. When in doubt about whether the tender offer requirement is triggered by acquisition of a public target, it would be advisable to make the filing for either the mandatory tender offer; or for an exemption therefrom. Failure to apply to the CMB may potentially end up in having to pay for 100% of the target company shares.
Accrual of interest at a punitive rate (Article 17) and the "freezing off" of voting rights (Article 13) are also built into the New Rules to deter investors from failing to comply with the prescribed mandatory tender offer timeline.
The New Rules recently issued by the CMB brings more clarity to some of the issues the CMB had to deal with since the former communiqué's issuance in 2009, including, the Redington case. In dealing with this case, the CMB seems to have moved in a direction where it would be more predictable for an investor to foresee whether a mandatory tender offer would be triggered. The New Rules also feature certain provisions to deal with a more complex tender offer ecosystem, for instance, in a scenario where competing voluntary tender offers may emerge to acquire shares of the same target company.
The New Rules harmonize the mandatory tender offer rules with the Capital Markets Law numbered 6362 that expanded the CMB's discretion to use the mandatory tender offer as an instrument to observe equity through protection of minority shareholders' interests, even on certain scenarios where there actually is no direct or indirect change in the management control of a public company. It remains to be seen how the CMB will exercise this instrument. One may expect the exercise of this regulatory power to be challenged in courts, possibly resulting in a new streak of administrative law litigation as was the case with Redington's acquisition of Arena shares.