Turkey: Related Party Transactions Under Capital Markets Legislation

Last Updated: 4 November 2014
Article by Nilay Celebi

Capital Markets Law No. 6362, the Communiqué on Corporate Governance Principles II-17.1 ("Communiqué") and the relevant regulations issued by the Capital Markets Board ("CMB"), regulate related party transactions of public companies. There are certain principles set forth in the capital markets legislation that establish how to conduct a related party transaction. Disclosures to the public should be made via the Public Disclosure Platform (KAP) for entering into such a transaction.

Related party transactions are defined under the Turkish Accounting Standards and spouses, company controlled directly or indirectly, parent / holding company, subsidiary, associates of the holding company, key directors are considered as related parties.

Capital Markets Law No. 6362

A general rule for executing a related party transaction is determined under Art. 17/3 of the Capital Markets Law No. 6362. As per said provision, prior to the related party transaction, the principles of which shall be determined by the CMB (see below explanations under the Communiqué), public companies should adopt a board of directors' decision, which determines the principles of the transaction to be conducted. The approval of the majority of independent members is required for the implementation of the relevant board of directors' decisions. If a majority of the independent members disapprove the transaction in question, it must be disclosed to the public on the Public Disclosure Platform (KAP) and the transaction must be submitted to the general assembly for approval. In such a case, no meeting quorum is required and the parties of the transaction and related parties cannot vote in the general assembly. The resolutions are taken by a simple majority vote. The resolutions of the board of directors and general assembly not adopted in accordance with the aforesaid principles shall be deemed void.

Communiqué on Corporate Governance Principles, II-17.1

Transactions to be Conducted with Related Parties

As per Art. 9 of the Communiqué, companies and their subsidiaries shall adopt a board of directors' resolution determining the principles of the transactions before conducting transactions as set forth below in Part 1 and Part 2 with the related parties:

Part 1:

In case;

  1. the proportion of the transaction cost to total assets calculated pursuant to the last financial statements disclosed to the public or the revenue sum constituted pursuant to the last annual financial statements disclosed to the public or the company value calculated by using the arithmetic ratio of the weighted average prices adjusted daily for six months before the date of the board of directors' resolution, as a base, in transactions similar to asset and service procurements and transactions of responsibility transfer between companies, their subsidiaries and the related parties; or
  2. the proportion of the transaction cost (the net book value if it is higher) to the total assets calculated pursuant to the last financial statements disclosed to the public or revenue sum constituted pursuant to the last annual financial statements disclosed to the public or company value calculated by using the arithmetic ratio of the weighted average prices adjusted daily for six months before the date of the board of directors' resolution, as a base, in transactions similar to asset and service sales between companies, their subsidiaries and the related parties;

will be more than 5%; a valuation for the transaction must be made before the transaction by an institution authorized by the CMB. No extra valuation report is required when the subject of the transaction is shares and the transfer of such shares is conducted at a stock exchange. In lease transactions and/or other transactions where cash flows are definitely separated, the present net value of the leaserevenues/expenditures and/or other revenues/expenditures which are calculated with the discounted cash flow method shall be considered as the transaction cost. In the event that ratios calculated pursuant to the aforesaid principals are negative or found unreasonable and accordingly inapplicable, such ratios shall not be taken into consideration and this matter shall be disclosed to the public on the Public Disclosure Platform (KAP).

Part 2:

  1. If it is foreseen that the ratios stated in Part 1 will be more than 10%, in addition to the obligation of conducting a valuation, it is required that a majority of the independent members' in the board of directors' vote for such a transaction. The members of the board, qualified as the representative of the related party shall not vote in such board meetings. If a majority of the independent members disapprove the transaction in question, it must be disclosed to the public on the Public Disclosure Platform (KAP) and the transaction shall be submitted to the general assembly's approval. In such a case; no meeting quorum is required and the parties of the transaction and related parties cannot vote in said general assembly. The resolutions are taken by a simple majority of the votes. The resolutions of the board of directors and general assembly not adopted in accordance with the aforesaid principles shall be deemed void.
  2. Real estate and its component parts and the real estate projects and rights thereof related to the transaction are subject to a valuation pursuant to the regulations of the CMB's real estate valuation.
  3. If a related party transaction is approved; the direct and indirect relationship between the related parties, the nature of transactions, assumptions used in the valuation and the summary of the valuation report, including the valuation results, whether or not the transactions were conducted in conformity with the results of the valuation report, and the justification of this matter shall be disclosed to public on the Public Disclosure Platform (KAP).

The provisions of Art. 9 of the Communiqué shall not apply for the portfolio management, investment and intermediary services received from the related parties of the investment trusts. Additionally, said article shall not apply to the related party transactions arising from the ordinary activities of banks and financial institutions.

The CMB may require, at its discretion, (i) the valuation of the transactions (related party or not) notwithstanding the ratios stated in the Communiqué, and (ii) the disclosure of the valuation results to the public according to principles stated in the same Communiqué.

Common and Long-Term Transactions

As per Article 10 of the Communiqué, the board of directors shall approve the scope and terms of the common and long-term transactions. Where a substantial change occurs in the scope and conditions of common and long-term transactions, a new resolution shall be adopted.

a) If the ratio between the cost of the common and long-term transactions between companies, their subsidiaries and related parties in an accounting period to the sale costs calculated pursuant to the last annual financial statements disclosed to public for purchase transactions is more than 10%.;

  1. or if the ratio between the cost of the common and long-term transactions between companies, their subsidiaries and related parties in an accounting period to the revenue cost calculated pursuant to the last annual financial statements disclosed to the public for sales transactions is more than 10%;

a report shall be prepared by the board of directors on the transaction conditions and a comparison of such transactions with market conditions, in addition to the board of director's resolution, and a complete form of the report, or its result, shall be disclosed to public on the Public Disclosure Platform (KAP). If the majority of independent members disapprove said transactions, the dissenting counter statement shall be disclosed to public on the Public Disclosure Platform (KAP).

In order to prepare the aforementioned report, it is compulsory to include the following matters:

  1. Information on the parties to the transaction, i.e. trade name, activities, whether they are a public company or not, and a summary of their financial data, including the total assets on an annual basis, the business profits, net sales, etc;
  2. General information on the relationship between the companies who are party to the transaction and the impact of said relationship on company activities;
  3. The date and subject of the agreement which forms the basis of the transaction, the substantive content of the agreement provided that there is no trade secret and in case such information has been disclosed in a document (i.e. prospectus) in the past, information regarding such matter;
  4. The evaluation criteria as to whether or not the transaction is in conformity with the market conditions; and
  5. An evaluation as to whether or not the transaction is in conformity with market conditions.

Art. 10 of the Communique shall not apply for the distribution of profits, the exercise of pre-emptive rights and payments related to the financial rights of the directors, the portfolio management, investment and intermediary services received by the related parties of brokerage companies, real estate investment trusts and venture capital investment trusts. Additionally, said article shall not apply to the transactions of banks and financial institutions with their related parties arising from their ordinary activities.

Conclusion

In general, public companies should fulfill some obligations under the capital markets legislation before executing a related party transaction, i.e. adopting a board of directors' resolution, preparing a report etc.. Additionally, it is important that a public company fulfill its obligation of public disclosure before a related party transaction.

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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