Being the fastest emerging market of Europe and the OECD, Turkey
is still an attractive market for international investors. Among
other forms of deal structures, investors are often interested in
leveraged buyout transactions ("LBO"). An LBO can be
explained as the acquisition of a company's shares or assets,
in which the purchase price is financed by collateralization of the
shares, assets and cash flow of the target company. When the former
Commercial Code No. 67621 was in force, there were no
legal restrictions against LBOs. Investors were freely enjoying
this structure for their share purchase transactions. However, in
2012, the new Turkish Commercial Code2 (the
"TCC") introduced the financial assistance prohibition.
Article 380 of the TCC prohibits transactions concerning the grant
of advance, loans or security by the target company for the purpose
of acquiring the target company's shares by a third party.
Article 380 provides two carve-outs to the general rule: (i)
transactions performed by banks and financial institutions as part
of their ordinary business, and (ii) transactions facilitating
share acquisitions by the target company' employees or the
subsidiary's employees. Nevertheless, these carve-outs will be
considered null and void if such transactions have a negative
effect of reducing the target company's statutory reserves.
The financial assistance prohibition is heavily inspired by the
Second Council Directive 77/91/EEC dated 13 December 1976) (the
"Directive"). In 2006, the European Commission amended
the Directive, loosening the tight financial assistance prohibition
on public companies. The financial assistance in Turkey was subject
to various discussions and criticism among scholars and legal
practitioners, even before the TCC came into force. However, the
TCC adopts the structure and system of the first version of the
Directive and goes one level further from the majority of EU
countries: it imposes the financial assistance prohibition on all
companies – public and private – without any
The official commentary of the TCC explains the mechanics of
Article 380 in further detail. It emphasizes that Article 380 of
the TCC does not create a de minimis rule, but in fact considers
the existence of any form of financial assistance for the
acquisition of shares invalid and null. It also does not make any
difference whether the financial assistance is given before or
after the acquisition of shares.
Lack of established market practice and solid court of appeals
precedent regarding the financial assistance prohibition has led to
an ambiguous zone for LBOs. Legal practitioners, banks, investors
and other players in the M&A practice work their way hard to
find a reliable mechanism to create a gateway to overcome the
financial assistance prohibition.
This newly introduced provision has not been tested before the
courts yet. The Turkish courts' view of Article 380 and its
scope is yet to be clarified.
1 Published in the Official Gazette dated 9 July 1956 and
2 Published in the Official Gazette dated 14 February
2011 and numbered 27846.
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