I. Introduction

Unlike the former Turkish Commercial Code, the Turkish Commercial Code numbered 6102 ("TCC") implemented a provision that allows joint stock companies ("JSC") to acquire their own shares within certain limits and conditions set forth therein. This provision was adopted from the Second Council Directive of European Economic Community numbered 77/91 and dated 13/12/1946 ("Directive").

As per the limits and conditions defined under the TCC, JSCs can neither grant third parties the right to acquire its shares on behalf of such party and on the account of the JSC nor grant security. Even though the Article derives from the Directive, the main purpose of implementing such restriction arises from Article 379 of the TCC. According to paragraph 1 of Article 379, a JSC is allowed to acquire and pledge its own shares in return of consideration for an amount that does not exceed or will not exceed as a result of a transaction, one tenth (1/10) of its principal or issued capital. Naturally, JSCs would be inclined to evade the 10% (ten percent) limit, for example by granting advance payments to third parties to perform transactions on behalf of the company. In this case, hiding the fact that a third party is acting on the account of the JSC would be deemed as a fraud against the law because provisions in relation to granting financial aid assume that the shares are acquired on behalf and on account of the third party and the JSC is not involved with the transaction. Thus, with the financial aid prohibition provisions, the TCC intends to prevent JSCs from "getting help" from third parties to acquire their own shares and exceed the acquisition limits granted under Article 379.1 In the following sections of this article, financial aid prohibition and the consequences of violating this rule will be explained in detail.

II. Financial Aid Prohibition and Exceptions

The general rule under the first paragraph of Article 380 is that when a JSC conducts a legal transaction with other persons and grants an advance payment, loan or security for the purposes of acquiring its shares, such transaction shall become null and void. We should point out that the Article only restricts financing transactions and not the share transfer itself. Furthermore, the prohibited transactions are not listed as numerus clausus (limited in number); meaning any other financing transaction with third parties for the purposes of acquiring shares of a JSC which does not fall into the exceptions stated under Article 380 (e.g. guaranteeing that the JSC will distribute dividends if the third party acquires the shares or that the JSC will undertake the costs of the acquisition) could also be prohibited. Granting sureties, guarantees, mortgages to third persons for the abovementioned purposes could be given as sample transactions that would become null and void under financial aid prohibition rules.

Furthermore, causing an actual loss or damage to a JSC's assets is not a requirement for a transaction to violate Article 380. Even financing transactions creating advantageous circumstances for the companies could be contrary to the rules if the company provides financial aid to other parties.

Article 380 has granted two exceptions under which the JSCs can procure financial aid without being subject to the prohibition:

  1. If the transaction is within the scope of activity of credit and finance organizations; or
  2. If the legal transaction is related to granting an advance, a loan or security to the JSC's employees or its group companies for the purposes of acquiring shares of such company.

The definitions of credit and finance institutions are included in the Banking Law numbered 5411. Under Article 3 of the Banking Law, credit institutions are divided into two groups; (i) the deposit banks (operating primarily for the purpose of accepting deposit and granting loan in their own names and for their own accounts) and (ii) participation banks (operating primarily for the purposes of collecting fund through special current accounts and participation accounts and granting loans). Finance institutions are defined as the institutions other than credit institutions, which have been established to perform insurance, individual private pension fund or capital market activities, development and investment banks, and financial holding companies. Thus, in the event a third party obtains credit or surety from a credit or finance institution defined under the Banking Law to acquire the shares of a JSC or if the credit or finance institution grants cash or non-cash credit to others for acquiring its own shares (provided that it does not deliver the guarantee of the credit itself), such transaction will be valid.2

Unlike the first exception stated in Article 380, which is applicable only to the transactions within the scope of activity of credit and finance organizations, a second exception is applicable to any transaction regardless of its subject. On the other hand, the TCC does not have a clear definition and scope for the term "employee" referred under Article 380. According to Article 3 of Occupational Health and Safety Law numbered 6331, "employee" refers to real persons employed in private or public workplaces regardless of their status under special laws. For this reason, some scholars argue that any worker, officer, contract personnel and government official should be included in the definition and the term should be interpreted broadly. However, the same scholars also point out that board members or managing directors of the company should not be within the scope of the definition since there is a high chance that people with management powers could use the assets of the company to gain control.3

Nevertheless, under both circumstances, such transactions should not (i) reduce the legal reserves of the JSC which are obliged to allocate as per the law and the articles of association; or (ii) violate the rules stipulated in Article 519 of the TCC, which regulates spending of the reserves; and (iii) should not make it impossible for the JSCs to allocate legal reserves regulated in Article 520 of the TCC. Hence, a transaction will become null and void if it violates any of these three rules, even though such transaction is stated as an exception under the first paragraph of Article 380.

Additionally, as per the second paragraph of Article 380, a transaction between a JSC and a third party shall also become invalid if such transaction grants the right to acquire, on behalf of the JSC, JSC's shares, JSC's affiliates' shares or shares of the companies where the JSC holds the majority shares or creates an obligation for the third party to acquire; and if such transaction would have been declared null and void in the event the JSC acquired such shares contrary to the rules contained in Article 379.

III. Consequences of the Breach

In case the JSC violates the financial aid restrictions and grants an advance payment, a loan or a security to another party, the financial transaction entered into by the parties will become null and void. According to Article 27 of the Turkish Code of Obligations numbered 6098, a contract is deemed as null and void if it is against the mandatory rules, rules of morality, public order, personal rights or contracts where the subject matter is impossible to perform. In such case, any person who has an interest in the transaction (i.e. shareholders, the creditors, JSC itself) can claim the invalidity of the transaction.

Furthermore, Article 385 states that in case the JSC acquires shares contrary to Article 379 or 380, it needs to sell the acquired shares within six (6) months following the acquisition. A special procedure has not been provided under the TCC for the disposal of such shares. However, the preamble of the TCC states that the board of directors of the company is authorized to perform the necessary actions to sell the shares. Thus, it is likely to say that the JSCs which acquire the shares contrary to the financial aid restrictions would be obliged to transfer the acquired shares to others within six (6) months. Otherwise, the JSC has to redeem such shares with capital decrease.4

IV. Conclusion

Article 380, along with Article 379, has implemented a broad restriction for joint stock companies in terms of the acquisition of its own shares and only allowed financial aid if it is within the scope of activity of credit and finance organizations and if the employees of the company are acquiring shares. As a result, this restriction has created a struggle for the JSCs to obtain financing without using the company's own assets, resources or to grant security to others. Furthermore, the fact that there are no precedents by the Court of Appeal in this matter to show guidance to JSCs and lack of consensus between scholars have created additional burden for JSCs because it is not possible to fully to get informed about the risks and consequences they might face. However, by taking into account that the TCC has been enacted in 2012, there is no doubt that there will be new precedents and improvements in the doctrine within the next few years to guide JSCs.

This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in September 2019. A link to the full Legal Insight Quarterly may be found here


1  Poroy, Tekinalp, Çamoğlu, Ortaklıklar Hukuku I 593, (13th ed. 2014).

2  Id. at 594.

3  Arıcı, Veziroğlu, Kaldıraçlı Devralma ve Anonim Şirketin Finansal Yardım Yasağı 50, (1st ed. 2014

4  Hasan Pulaşlı, Şirketler Hukuku Şerhi 1790, (3rd ed. 2018)

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.