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:
- necessary to avoid a serious loss to the company;
- based on a capital decrease;
- due to a statutory requirement;
- for the purpose of collecting debts to the company;
- within the scope of permitted activities of the company; or
- 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.
- 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.
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.