Turkey: A Preliminary Step For Share Buy-Backs

The Capital Markets Board of Turkey (the "CMB") issued a resolution, on September 1, 2009 through its Weekly Bulletin, which sets forth a framework for share buy-back programs that may be carried out by brokerage firms and investment companies listed on the Istanbul Stock Exchange (the "ISE") (the "Resolution").

The Resolution finds its roots in Article 329 of the Turkish Commercial Code which, as a general rule, prohibits joint stock companies to acquire their own shares, but which at the same time, as an exception, authorizes joint stock companies dealing with securities trading to execute such acquisitions.

The share buy-back process is regulated in detail for the first time and such detail is especially significant as it illuminates the principles to which other type of joint stock companies will be subject in the upcoming period. The Draft Turkish Commercial Code, expected to enter into force in 2010, provides all types of joint stock companies the opportunity to acquire their own shares under certain conditions and softens the currently applicable limitations on share buy-backs to a certain extent.

In practice, companies use share buy-backs for returning excess cash to their shareholders. Such payment is an alternative to periodical dividend payment and gives the signal to the market that investment in company shares is more profitable than any other alternative investment option. Also, repurchase of shares by the issuer decreases the number of outstanding shares representing share capital which in turn increases earnings per share. An increase in earnings per share often gives the impression to the investors that the stock is undervalued and has the potential for increase in value. With the Resolution of the CMB, listed brokerage firms and investment companies have the chance to benefit from price support advantages and to provide security for long-term investors during times of volatility.

As per the Resolution, following principles shall apply to share buy-backs that may be carried out by listed brokerage houses and investment companies (the "Company"):

Structure of the Share Buy-Back Program and General Assembly Approval

The Board of Directors shall draft a share buy-back program (the "Program") and shall submit it to the General Assembly for approval. The Program to be proposed shall cover (i) purpose of the share buy-back, (ii) resource and amount of the fund to be used for share buy-back, (iii) maximum number of shares that may be repurchased, (iv) minimum and maximum price limits determined for share buy-back, (v) persons authorized for repurchase, (vi) duration of the Program to be conducted, (vii) date of the General Assembly on which the Program will be discussed and (viii) summary of the last executed share buy-back program.

Upon review of the proposal, the General Assembly may approve, reject or amend the Program. If the General Assembly approves or amends the Program, then it shall authorize the Board of Directors for the implementation of the same.

It should be noted that the approval of the General Assembly is valid only for a maximum period of 18 months. If, upon expiration of the 18 month period, continuation of the share buy-back is deemed necessary, the Board of Directors must submit the same Program or a revised version to the General Assembly for approval.

Exemption from General Assembly Approval

As a rule a share buy-back program shall be initiated upon approval of the General Assembly. However, if it is necessary to prevent a serious and imminent harm, the Board of Directors may carry out share repurchase without the authorization of the General Assembly.

The following steps shall be taken, in cases where the Board of Directors decides to conduct any share repurchase without General Assembly authorization:

  • Two days before the commencement of the repurchase, the Company shall disclose;
    • The purpose and the reason of the share buy-back,
    • The number of shares planned to be repurchased,
    • The maximum amount to be paid in relation to the operation.
  • On the first business day following the repurchase date the Company shall disclose;
    • Total nominal value of repurchased shares,
    • Transaction price,
    • Transaction date,
    • The ratio of total amount of repurchased shares to the share capital of the Company,
    • Privileges, if any, attached to the repurchased shares.
  • In addition to the above, the Board of Directors shall inform the General Assembly regarding (i) the purpose and the reason of the share buy-back, (ii) transaction date, (iii) total nominal value of repurchased shares, (iv) cost of repurchase, (v) the ratio of total amount of repurchased shares to the share capital of the Company, and (vi) if any, privileges attached to the repurchased shares.

Limitations on Share Buy-Backs

The Resolution, while drawing the structure of the share buy-backs, envisaged certain limitations in order to prevent any abuses. Accordingly, the total nominal value of shares to be repurchased plus the total nominal value of shares already repurchased shall not exceed 20% of the paid in/registered capital of the Company. If such percentage is exceeded, the surplus shall be disposed within a period of six months.

In addition, share buy-backs shall not be structured in a way to damage the equity capital of the Company. Accordingly, any share buy-back program to be conducted shall not decrease the equity capital of the Company below the total amount of share capital plus restricted reserves. In case of a capital increase, the Company shall not buy back its shares between the date on which the capital increase decision is made and the date on which the capital increase transactions are completed.

Furthermore the Company shall not buy back its shares and/or shall not dispose repurchased shares, in case there is an inside information the disclosure of which is deferred by the Company or there is an undisclosed material information which may potentially effect the share price.

Also, in an attempt to prevent the Board of Directors from manipulating any decisions to be made in the General Assembly, exercising voting rights arising from repurchased shares is prohibited.

Share Buy-Back Orders

As per the Resolution, any repurchase transaction must be carried out through the ISE and accordingly only shares tradable at the ISE may be the subject of share buy-back operations.

The Resolution sets the following principles, in addition to the transaction rules that may be envisaged by the ISE, for share buy-back orders:

  • Share buy-back orders shall not be placed during (i) the opening session, (ii) the last 15 minutes of the first session, and (ii) the first and the last 15 minutes of the second session,
  • The price of the share buy-back orders shall not be higher than the price of the existing orders and the price of the last executed market order.
  • The total amount of shares to be repurchased in a given day shall not exceed 25% of the relevant shares' average daily trading volume observed within the preceding three months.
  • For each transaction day the Company shall appoint only one brokerage firm for the execution of share buy-backs.

Disclosure Requirements

In relation to the share buy-back programs the following information shall be disclosed to the public:

  • The Board of Directors shall prepare a share buy-back program proposal and shall publish the same on the corporate web site at least fifteen days before the designated General Assembly date.
  • If the General Assembly amends the proposed share buy-back program, the amended program shall be disclosed to the public and shall be published on the corporate website on the business day following the General Assembly date.
  • At least two days before the implementation of the program, a disclosure shall be made in order to notify investors about (1) the commencement of the implementation, (i) the title of the brokerage firm which will provide intermediary services in relation to the share buy-back program, and (ii) the information regarding the commission to be paid to the brokerage firm.
  • On the first business day following the execution day of each transaction (i) total nominal value of repurchased shares, (ii) transaction price, (iii) transaction date, (iv) the ratio of total amount of repurchased shares to the share capital of the Company, and (v) privileges, if any, attached to the repurchased shares shall be disclosed to the public.
  • Within 5 business days after the termination of the share buy-back program, the Company shall disclose (i) average and maximum price paid for a share, (ii) cost of repurchase, (iii) total number of repurchased shares, (iv) transaction dates, (v) privileges, if any, attached to the repurchased shares, and (vi) the ratio of total amount of repurchased shares to the share capital of the Company. Such disclosure must be made separately for shares cancelled after the acquisition and for shares hold after the acquisition. In addition, such information shall also be presented to the shareholders in the General Assembly.
  • If the approved program is amended by the General Assembly at a later stage through a new resolution, the amended program shall also be disclosed to the public along with the reasons of amendment.

Disposal of Repurchased Shares

The Company may determine a lock-up period for repurchased shares and bonus shares acquired in connection with repurchased shares freely provided that such lock-up period does not exceed three years. The share capital of the Company must be decreased, if such shares are not disposed until the end of the designated period.

The repurchased shares and bonus shares acquired in connection with repurchased shares shall solely be disposed at the ISE and such disposal shall only be conducted after the completion of the share buy-back program.

Upon execution of each disposal transaction, the following information shall be disclosed to the public on the first business day following the transaction date:

  • The total nominal value of disposed shares,
  • Transaction price,
  • Transaction date,
  • The ratio of total amount of disposed shares to the share capital of the Company,
  • Privileges, if any, attached to the repurchased shares.

Accounting

As per Turkish Accounting Standard No: 32, repurchased shares shall be registered as a deduction item under the equity capital and any profits or losses arising from disposal of repurchased shares shall not be reflected into the income statement.

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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