Turkey: Prohibition Of Financial Aid For A Company To Acquire Its Own Shares

Last Updated: 14 June 2018
Article by Oguzcan Dozcan and Melis Yazici

A. The Concept of Companies' Purchase Of Its Own Shares

The concept of companies' purchasing of its own shares entered into Turkish Law through the Turkish Commercial Code numbered 6102 and regulated in Article 379 of Turkish Commercial Code. This term, was not regulated in the repealed Turkish Commercial Code Numbered 6762 ("TCC").

The term which is one of the most important reforms of Turkish Commercial Code, provides   legal basis for potential factual circumstances that may arise from corporate law and to fulfill demands of business.

The Turkish Commercial Code allows joint stock companies to acquire up to ten percent of their shares as set out in Article 379 paragraph 1 of TCC which indicates that "A company cannot acquire and accept as pledge its own shares in return for consideration, at an amount which exceeds or will exceed as a result of a transaction, one-tenth of its principal or issued capital." This provision shall also be applicable to the shares which a third party acquires or accepts as a pledge in its name, but on behalf of company.

Second paragraph specifies the acquisition process. In this context, Board of Directors must be authorized by General Assembly for this particular transaction.

Joint stock companies may acquire their shares in the presence of reasonable grounds such as intent to make the employees of the company new shareholders or to meet the needs of the investment plan. As this is inconvenient1 according to some of the authors, there are some limitations placed in order to avoid the potential shortcomings of such purchase pursuant to the relevant articles of TCC. Accordingly, board of directors has to obtain a special authorization from the General Assembly to execute these transactions, whereas General Assembly is empowered with the authority to control the board of directors. Additionally, according to the expression of the preamble of Turkish Commercial Code, which indicates that "General Assembly may stipulate the exercise of this authority to certain purposes", General Assembly may authorise board of directors only for certain reasons.

All this sensitivity is a necessary effort of the legislator to prevent the purchase of joint stock company's own shares from creating situations which could harm the fundamental principles of the corporate law and to protect the shareholders' and other traders' to whom the company is in business relationship and trust to company capital.

B. Prohibition of Financial Aid for a Company to Acquire its Own Shares

Pursuant to the Article 380 of TCC, the legislator intends to avoid financial support of the Company in purchasing process by foreseeing the potential consequences of the new concept under Article 379 which paves the way for such purchase with a permit.

Pursuant to the Article 380 of TCC, legal transactions performed between the company and a person, including giving advance, loan and guarantee for the purpose of share acquisition are null.

According to the preamble of TCC, it's obvious that the first paragraph aims to prevent the Article 379 from being ineffective and thus prevent the evasion of the law by providing financial assistance to third parties for the purchase of its own shares. The preamble of the law introduces that the purpose of the provision is intended to prevent the evasion of the law.2

Since the shares of the company is a value that depends on the company's own financial position, the possible loss of value can harm the company twice. In this respect, it can easily be mentioned that the legislator's effort is necessary to control this issue.

The first question that may arise is whether the numerus clausus principle is applicable for Article 380 of TCC which deems advance payments, loan or guarantee as invalid transactions. To explain more precisely, is the company prevented from doing only these transactions, or also from doing any financial support transactions?

It can be considered that the preamble of the provision resolves this confusion. The origin of the provision is European Economic Community's Second Directive related with companies numbered 77/91 and dated 13/12/1976. In accordance with ratio legis, the expression of "the transaction which concerns payment in advance, loan and guarantee" should be interpreted broadly. That expression covers all types of transactions. The term "other person" in the provision is used in a wide sense, and refers to the shareholders, board members, managers and the third persons. However, the Preamble introduces that the legislator aims to evaluate all kinds of financial support outside of this scope, emphasizing that people who are counted in the second sentence of the paragraph are exempted from the term "third party." Additionally, financial support for all third parties should be considered within this scope.3

Article 380/1 of Turkish Commercial Code regulates that such transactions will be deemed as invalid. Nullity was regulated in Article 27 of the Turkish Code of Obligations No. 6098. Nullity, as one of the grounds for ineffectiveness since the beginning of the transaction, has been stated as "Contracts that are against to the rules of morality, public order, personal rights or contracts whose subject is impossible are null and void" in the text of the article and people who have current interest may claim the nullity. For example; the company itself4, shareholders5, and even its creditors may claim that the surety agreement is null and void.

Regardless of the effect of the transaction, the members of the board of directors will be liable if Company gets harmed by a transaction against the law which means evasion of law.

Footnotes

1 Otlu, F., Bekçi, İ. & Karataş, Ö.N. (2014). TTK' ya Göre Anonim Şirketlerin Kendi Paylarını İktisap Etmesi ve Muhasebeleştirilmesi. Çankırı Karatekin Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 4(1), s.287

2 Gürel, Murat(2014) Anonim Şirketlerin Kendi Paylarının İktisabı Amacıyla Finansal Destek Verme Yasağı, p.72

3 Gürel, Murat(2014) Anonim Şirketlerin Kendi Paylarının İktisabı Amacıyla Finansal Destek Verme Yasağı,p.131

4 Gürel, Murat(2014) Anonim Şirketlerin Kendi Paylarının İktisabı Amacıyla Finansal Destek Verme Yasağı, p. 231

5 Okutan, Nillsonn, Finansal Yardım Yasağı, p. 98

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