Financial Assistance Prohibition And Leveraged Buyouts Under Turkish Law

1. In General

1. The prohibition on financial assistance was introduced to Turkish law for the first time with the Turkish Commercial Code numbered 6102. The relevant provision stipulates that a company may not provide advances, loans or guarantees for the acquisition of its own shares by third parties, and only loans provided by banks within the scope of their ordinary activities and assistance provided to employees for the acquisition of shares were exempted. Directive 2006/68/EC adopted in 2006 softened this rigid structure and permitted financial assistance under certain conditions. However, Article 380 of the TCC in Turkish law did not reflect these changes and adopted a strict regulation with limited exceptions, which essentially prohibits financial assistance .¹
   1. Leveraged Buy-Out (LBO)
2. A leveraged buyout refers to transactions in which the financing for the acquisition of a company's shares is provided through the assets of the target company or the assets of another company that it will merge with after the acquisition. In this model, the financing required for the transfer of shares is financed directly or indirectly through the target company's own resources.
3. Such transactions fall within the scope of the financial assistance prohibition regulated under Art. 380 TCC. If the financing for the transfer of the shares is provided directly by the company or serves this purpose, the prohibition of financial assistance is violated.
4. In leveraged buyouts, the fact that the transaction is made before or after the acquisition of shares does not matter in terms of the application of the prohibition. In order for the prohibition of financial assistance to apply, it is sufficient that the primary purpose of the transaction is to ensure the acquisition of shares. This purpose may also be realized implicitly; a written agreement between the parties is not required. Financial assistance provided after the acquisition of shares is also within the scope of the prohibition. In order to prevent circumvention of the prohibition, the purpose of the transaction is taken into consideration rather than the timing of the transaction.
   1. Financial Assistance Prohibition and Exceptions (Art. 380 TCC)
5. Pursuant to Article 380/1 of the TCC, it is null and void for joint stock companies to provide loans, advances or guarantees to third parties in order to facilitate the acquisition of their own shares. As explained in the rationale of the provision, these expressions should be interpreted broadly and all transactions that will enable the company's capital to be used for financing the acquisition of shares should be considered within this scope .²
6. In order for the prohibition of financial assistance to apply, the company providing the assistance and the company whose shares are transferred must be the same legal entity. It does not matter whether the transfer of shares takes place before or after the aid transaction, as long as there is a connection in terms of purpose. Similarly, the type of guarantee provided by the company is not important; it may be in cash, in kind or in personam. However, the assignee's pledging these shares as collateral to credit institutions is excluded from this prohibition.³
7. Article 380 of the TCC does not stipulate a threshold regarding the amount of shares taken over. Regardless of the amount, the prohibition shall apply if the transfer of shares is supported for financial assistance purposes. In case of a violation of the prohibition, only the legal transaction related to the financial assistance transaction is null and void⁴. Although there is no clarity in the legislation and judicial practices regarding the validity of the share transfer transaction, it is expected that it will be evaluated according to the circumstances of the concrete case. On the other hand, if the financial assistance transaction has been performed, the obligation of return will arise .⁵
8. The prevailing view in the doctrine is that the obligatory transaction is invalid, whereas the dispositive transaction is valid; however, if it has been performed, the performed acts must be returned. For example, the suretyship granted by the company shall be deemed invalid and the company shall not be held liable.
9. Two exceptions are stipulated under Art. 380 TCC: i. Transactions carried out by credit and financial institutions within the framework of their fields of activity. However, this exception only covers financing for the transfer of own shares. ii. Advance, loan or collateral transactions provided by the company for the acquisition of company shares by its own or its subsidiaries' employees. This exception does not apply to senior executives. In terms of both exceptions, the transactions must not reduce the company's reserves and must be carried out in accordance with Articles 519 and 520 of the TCC .⁶
10. As a matter of fact, share transfers made without taking into account the prohibition on financial assistance, even if it is a new issue in Turkish law, has been included as a ground for annulment in some judicial decisions . ⁷

Conclusion

11. In conclusion, the prohibition on financial assistance introduced by Article 380 of the TCC aims to protect the corporate structure by limiting the use of the company's assets in share transfer transactions. The scope and exceptions of this prohibition should be carefully evaluated, especially with respect to transactions such as leveraged buyouts. As seen in practice, the prohibition of financial assistance is a control mechanism based not only on form but also on purpose.

Footnotes

1. Veziroğlu, C. & Fatih Arıcı, M. (2018). Leveraged Buyout and Financial Assistance Prohibition of Joint Stock Company. On İki Levha Publishing, pp.26-30

2. Arkan, Sabih. "The Problem of the Priority of the Provisions Related to the Group of Companies." Prof. Dr. Zühtü Aytaç'a Armağan, 2024, pp. 477-482

3. Albayrak, Özlem Akıncı "Protection of Company Assets in Joint Stock Company Law." 2022, s. 481.

4. Doğu, Hakkı Mert. Cheating Against the Law. On İki Levha Publishing, 2023. p.160

5. Doğu, Hakkı Mert. Cheating Against the Law. On İki Levha Yayıncılık, 2023. p.161; Arkan, Sabih. "The Problem of the Priority of the Provisions Related to the Group of Companies." Prof. Dr. Zühtü Aytaç'a Armağan, 2024, pp. 477-482

6. Raziye Aksu Özkan, "An Evaluation of the Reserve Fund Allocation Practice in Joint Stock Companies Acquiring Their Own Shares", MÜHFHAD 2021, C. 27, S. 1, p. 754 et seq.

7. Ankara RCoA 7th Civil Chamber's decision dated 01.07.2021 and numbered 2021/495 K.

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.