Turkey: The New Right Of Companies To Acquire Their Own Shares

The prolonged legislative process surrounding the Draft Turkish Commercial Code (Draft TCC) prompted the Capital Markets Board (CMB) to introduce, on September 1st, a new principle entitling listed brokerage companies and investment trusts to acquire their own shares out of economic necessity. Although there has been some controversy over the legality of the new principle – whether it contravenes the prohibition on companies acquiring their own shares – the CMB appears to rely on an exemption in the existing provisions of the TCC. What comes as a surprise for many people is the CMB's delay in regulating this area despite the existence of such exemption since the CMB was founded. Not surprising, therefore, is the criticism directed at the CMB for not considering market exigencies earlier.

Existing TCC Provision and Exemption

On one hand, according to Article 329 of the TCC, joint stock corporations may neither purchase nor accept their own shares as collateral, and any agreement to that effect is deemed null and void. On the other hand, if the acquisition of shares or the acceptance of a pledge over the company's own shares were to fall within the scope of business permitted in the joint stock corporation's articles of association, then such an agreement would be valid.

Nevertheless, a company is permitted to acquire its own shares only on a temporary basis, and it should endeavor to dispose of such shares as soon as possible. In the meantime, the shares have no voting rights.

Provisions under the Draft TCC

Under the Draft TCC, joint stock companies are permitted to acquire their own shares up to 10% of the share capital. The decision to acquire should be adopted at the shareholders meeting, authorizing the board of the directors to carry out the acquisition. Such authorization will be limited to a maximum 18-month period, and should set forth the minimum and maximum acquisition price.

In principle, a company is prohibited from acquiring its own shares in excess of 10% of its share capital. That said, the prohibition does not apply if the acquisition was:

  1. necessary to avoid a serious loss to the company;
  2. based on a capital decrease;
  3. due to a statutory requirement;
  4. for the purpose of collecting debts to the company;
  5. within the scope of permitted activities of the company; or
  6. without consideration.

Similar to the existing provision in the TCC, the shares acquired by the company should be disposed of promptly without harming the company, and in any case within three years of their acquisition, unless such shares are less than or equal to 10% of the company's total share capital.

Expected Benefits

  • enabling the company to act as a market maker in the stock exchange
  • facilitating IPOs
  • helping the company to combat manipulation
  • preventing hostile takeovers and changes of control on the stock exchange
  • facilitating employee offerings

The New CMB Principle

Taking into consideration market necessities and the above-mentioned exemption, where acquisition of shares falls within the permitted scope of company's business – contrary to the general principle prohibiting companies from acquiring their own shares – the CMB decided that listed brokerage firms and investment companies (including venture capital and real estate investment trusts) could qualify for such an exemption and acquire their own shares.

The process of benefiting from such exemption is quite similar to the Draft TCC provisions. The company should approve such acquisition through a shareholders' meeting and authorize the board of directors to carry out such acquisition for a maximum 18-month period subject to a share acquisition program. Such program should identify the motives for the transaction, amount and source of the allocated funds, maximum number of shares to be acquired, price limits, designated person for the acquisition, and the term of such authorization. The program should be disclosed and published on the website of the company, and should be updated if any amendments are made. The board of directors can also initiate acquisitions without the authorization obtained through a shareholder's meeting, provided that reasonable cause exists, public disclosure is made, and such acquisition is reported at the next shareholders' meeting.

The total nominal value of the shares to be acquired cannot exceed 20% of the paid-in/issued capital. Any excessive amounts should be disposed of within 6 months from the date of purchase. The acquired shares have no voting rights, and acquired shares and free shares issued based thereon can only be held for a period of three years. Those held longer will be cancelled through capital reduction.

There are certain other limitations on the conditions of acquisition, including on price and volume. The price cannot be more than the price of existing offers or the last sale price, and the daily acquisition volume cannot be more than 25% of the average daily operations over the previous 3 months. Also, only one brokerage firm can be employed for acquisitions in a single day. Finally, the acquired shares can be sold on the Istanbul Stock Exchange only after the last day of the acquisition program, and any sale after such date should be publicly disclosed with the transaction details.

Some Risks to Bear in Mind

The purpose of this new decision is to allow listed brokerage firms and investment trusts to be active in controlling the stability of share prices at times of market manipulation or price fluctuations. Yet the primary reason behind the prohibition on companies acquiring their own shares is to prevent companies from engaging in manipulative behavior through these acquisitions. With this new CMB Principle, the percentage of shares that a company is allowed to acquire is set as 20%. However, the average free-float rate is 33%, as per the Association of Capital Market Intermediary Institutions of Turkey's data of 2 October 2009, meaning that the permitted threshold carries a risk of manipulation by the company itself.

Although the CMB Principle involves certain restrictions to prevent companies' misusing acquisition of their own shares, various safeguards from other countries' legislation may be included as well. For example, the share price should at least be 10% lower than the market value, the company should sell the acquired shares at a price that is at least higher than the acquisition price and/or the company should hold special reserves – in addition to the legal reserves – that are at least equivalent to the value of the acquired shares.

In particular, the board of directors of the companies which are going to carry out the acquisition should pay great attention to the legal procedures in acquiring shares and selling the acquired shares, as otherwise the transaction could result in a civil and/or criminal lawsuit against the directors.

What's Next?

It is surely going to be a challenge for the first brokerage firm or investment trust to benefit from this new CMB Principle, and for other market participants, it is going to be an instructive development to observe the implications of the transaction. As acquisition of one's own shares can be a necessity or a policy for many companies, now that public brokerage firms and the investment trusts are entitled to acquire their own shares, the next challenge for the CMB is to consider permitting other types of public companies to do so on the basis of the same TCC exemption.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions