ARTICLE
23 January 2024

Initial Public Offering In Capital Market Law

E
Egemenoglu Law Firm

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Egemenoglu is one of the largest full-service law firms in Turkey, advising market-leading clients since 1968. Egemenoğlu who is proud to hold many national and international clients from different sectors, is appreciated by both his clients and the Turkish legal market with his fast, practical, rigorous and solution-oriented work in a wide range of fields of expertise. Egemenoğlu has been considered worthy of various rankings by the world’s most leading and esteemed rating institutions and legal guides. We have been ranked as Recognized in “Project and Finance” and “Mergers and Acquisitions” areas by IFLR 1000. We also take place among the top- tier law firms of Turkey at the rankings of Legal 500, at which world’s best law firms are regarded, in “Employment Law” and “Real Estate / Construction” areas. Also our firm is regarded as significant by Chambers& Partners in “Employment Law” area as well.
Capital markets play an intermediary role in the relationship between companies, individual investors and institutional investors within the economic system.
Turkey Corporate/Commercial Law

1. INTRODUCTION

Capital markets play an intermediary role in the relationship between companies, individual investors and institutional investors within the economic system. Henceforth, capital markets assume a crucial role in aggregating financial resources from both individual and institutional investors, facilitating their transfer to companies requiring funding1.

The inclusion of the savings held by the public in the capital markets through modern methods and the realization of the objective of "spreading the capital to the grassroots" by easily meeting the financial needs of commercial companies within this scope is realized through initial public offerings of capital market instruments. Through the utilization of the initial public offering method, it is ensured that the capital requirements of companies are met without resorting to external borrowing. This approach leverages "mattress savings" and contributes to the deepening of capital markets.

Nowadays, many companies frequently resort to the initial public offering method in order to plan capital expansion, company financing and growth returns, and it is observed that initial public offering is the new trend to meet all foregoing objectives. In this piece, (i) the profits of the initial public offering, (ii) the way the initial public offering is addressed in the Capital Markets Law numbered 6362 ("Capital Market Law") and (iii) the legal steps to be taken during the initial public offering phase are discussed.

2. INITIAL PUBLIC OFFERING

To inject confidence in capital markets and safeguard investors by furnishing requisite information, specific regulations are enacted in accordance with Turkish Law, mirroring analogous legal frameworks globally. In this respect, initial public offering is essentially a sale transaction and is subject to the provisions of the Capital Markets Law.

The initial public offering method is an alternative financing method used by a company to meet its financial needs and is regulated under Article 3, paragraph (f) of the Capital Markets Law. Accordingly, initial public offering is defined as "a general call for the purchase of capital market instruments through all kinds of means and the sale realized following such call".

3. PROFITS OF THE CAPITAL MARKET LAW

In general, the advantages of initial public offering for companies are as follows:

a. Ensuring a source of financing and liquidity: Through initial public offerings, companies receive funds which do not require repayment at a lower cost than other alternative financing methods. In addition, after the initial public offering, the shares offered to the public can be bought and sold at the prices formed according to the market supply and demand, thus providing a liquidity opportunity to the existing shareholders. Thus, shareholders of the company have the opportunity to leverage shares traded on Borsa İstanbul A.Ş. ("Borsa Istanbul") as collateral in loan transactions, thereby transforming this dormant asset into a viable financing instrument2.

b. Recognition3: Various information regarding with the companies whose shares are traded on the Borsa Istanbul is made available to domestic and foreign investors through data broadcasting organizations, in accordance with the principle of public disclosure and capital markets legislation. This assists companies and company products to be recognized both domestically and internationally, as seen in recent initial public offerings. In this context, it is possible to cooperate with domestic and foreign companies operating in the same market, to provide investment, to create joint ventures and to work on similar issues.

c. Institutionalization: Companies that go public and whose shares are traded on the Borsa Istanbul accelerate their corporate governance processes and adopt professional management techniques in a shorter period of time due to capital market legislation, interaction with international markets, foreign investments and increased investor awareness.

d. Secondary Public Offering: Even after the initial public offering, companies can create a refinancing opportunity by meeting their resource requirements arising from investment and similar needs while their shares are being traded through "Secondary Public Offerings" that can be realized by restricting the pre-emptive rights of their existing shareholders.

e. Globalization: With the introduction of the trading of companies' shares on Borsa Istanbul, companies can easily issue capital market instruments in foreign countries and have their capital market instruments listed and traded in that country4.

f. Highly Qualified Labour Force: In companies which are traded on Borsa Istanbul, the attraction of qualified labour force is realized more quickly and easily than in unlisted companies.

g. Mechanism for exit from the company: In order to utilize this function of the IPO, the companies in question regulate in their shareholders' agreements the possibility to leave the company or to reduce the shareholding ratio by offering their shares to the public within certain time frames if certain conditions are met or if the company is to be terminated for any reason. Thus, initial public offerings may be used as a mechanism to exit from the company. Moreover, listing of shares in the stock exchange, which is the subsequent step in an initial public offering, provides a market for shareholders who are not happy in the company. Availability of such a market allows some shareholders to exit the company without facing legal conflicts.

4. LEGAL PROCESS

The conditions regarding the initial public offering of the shares of non-publicly traded companies (which is referred to as initial public offering in practice) are regulated by the Equity Communiqué numbered VII-128.1 ("Equity Communiqué") published by the Capital Markets Board ("CMB"). The procedures to be performed and the documents to be prepared according to the types of initial public offerings are described in the relevant articles and annexes of the Equity Communiqué. The procedures within the scope of initial public offering application can be briefly summarized as follows:

a. Making an agreement with an Intermediary Institution: To realize the initial public offering, the company must first make an agreement with an intermediary institution These intermediary institutions are the institutions that authorized by the CMB. Intermediary institutions undertake to carry out the duties imposed by the legislation during the initial public offering process. In addition, the intermediary institution may also undertake to partially or fully purchase the shares to be offered to public.

b. Performing an Independent Audit: The financial statements of a company that willing to publicly traded must be complete and audited in accordance with the rules. The company must prepare these financial statements in accordance with the capital markets legislation and have them audited by authorized independent audit companies5.

c. Amendment of the articles of association and convening general assembly: As part of this process, the articles of association of companies that are not publicly traded are reviewed within the scope of capital markets legislation and other regulations. Accordingly, in order for the revised articles of association to comply with capital market legislation and other regulations, the draft amendment to the articles of association is first submitted to the CMB for approval.

This amendment to the articles of association will be very important as it will constitute the guidance of the company after it becomes a listed company. The basis of many financial and operational issues, from dividend distribution to the formation of privileged shares, is established at the stage of application for amendment of the articles of association.

d. Approval of the Prospectus: Once the CMB approval for the amendment of the articles of association is obtained, the prospectus process for the initial public offering begins in parallel. An application is made to the CMB for the approval of the prospectus prepared in accordance with the CMB legislation. At this stage, applications are also made to Borsa Istanbul with the necessary documents, including the independent legal expert report required by the relevant legislation, for the shares to be traded on the market.

Once all these transactions are completed, the company's shares are offered to the public within the framework of CMB regulations.

CONCLUSION6

In contemporary economic conditions, the initial public offering has evolved into a highly significant financing instrument for companies. The institutionalization and systematization that occurs in the structuring processes of companies with initial public offerings increases both the professionalization of the business and operations of companies in their fields of activity and the recognition of the company. However, certain processes need to be followed in the initial public offering of shares. Besides the things to be done and procedures to be followed during the preparation process for the initial public offering, it is very important to have a good command of capital market law, including contracts such as brokerage agreements, as it is difficult to eliminate mistakes to be made during this period. Within this process, the strict compliance of regulatory authorities and institutions such as the Capital Markets Board constitutes one of the other items that will make it necessary for companies to obtain legal support at this stage. Authorized persons of the companies have legal and criminal responsibilities within the scope of the documents and information prepared and submitted to the institutions in these processes. It is important for the sales price and brand value of the shares that the public offering is carried out in accordance with the rules within the planned timetable.

Footnotes

1. MUTLU UŞAKLI, Senem, "Halka Arz Kavramı ve Halka Arzlarda Kullanılan Satış Yöntemleri", June 2010

2. Halka Arzın Faydaları ve Halka Arza Karar Verme, https://www.borsaistanbul.com/tr/sayfa/151/halka-arzin-faydalari-ve-halka-arza-karar-verme Access Date: 21.11.2023

3. Sermaye Piyasası Kurulu, Halka Arz, 2022

4. Kocaeli Oda Vizyon Dergisi, Sadece Finansman Sağlamanın Değil, Küreselleşmenin De Ön Koşulu: Halka Açılma, 15 November 2017, Altındağ, Ankara.

5. Halka Arzın Faydaları ve Halka Arza Karar Verme, Borsa İstanbul, Web Site: https://www.borsaistanbul.com/tr/sayfa/151/halka-arzin-faydalari-ve-halka-arza-karar-verme

[6] This piece has been prepared for the purpose of informing investors. The investment information, comments and recommendations contained herein do not constitute investment advice.

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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