Share Buyback of Companies Pursuant to the New TCC
The Turkish Commercial Code numbered 6102, which will come into force on 1 July 2012 (the “New TCC”) has introduced one of the most widely used corporate finance method to The Company Law of Turkey through article 379 and the following articles, constituting an important reform. As of the entry into force of the New TCC, the companies, if they satisfy certain conditions, will be able to acquire their own shares or accept as pledge in exchange for securing a debt. This article shall briefly analyze the current prohibitive measures on share buyback instrument (the term “share repurchase” is also used interchangeably) and the easing off provisions to the stringent rules through the capital markets legislation and then shall focus on the possibility introduced by the New TCC, the conditions of share buyback of the companies and the sanctions for the transactions in violation of the code.
TCC and the Principle Resolution of the CMB
Pursuant to article 329 of the Turkish Commercial Code numbered 6762 (the “TCC”), it is forbidden for the joint stock companies to buy back its own shares in exchange for any consideration or accept pledges thereon. Transactions in violation of this prohibition shall be null and void. This prohibition was intended to shield the structure of share capital, interest of creditors and unequal treatment of shareholders of the companies and aims to prevent inconveniences such as the main shareholder charging its capital market debts to the company and the withdrawal of share capital. Nonetheless, the possibility of the company to protect itself (for example by preventing manipulative share trading and hostile takeovers against corporate raiders by means of greenmailing) through share buybacks is also abrogated by this prohibition[i].
Article 329 exhaustively lists circumstances exceptions to this prohibition. These exceptions are as follows: (i) the share buyback for the purpose of share capital (equity capital) reduction to boost leverage -any money paid to company to acquire share is returned to the shareholder and any relevant shares are cancelled leading to decreased number of shares and increased value for per share earning-, (ii) for the purpose of hedging corporate debt with company receivables other than subscription (equity participation contract), (iii) through total transfer of assets or an establishment; (iv) in the event the ordinary scope of activity of the company is engaging in such buyback transactions, (v) in the event the board members, directors or officers of the company pledge their shares as security for their obligations, (vi)in the event such buyback is made free and not in exchange for any consideration. The shares bought back pursuant to one of these exceptions shall not be represented in the general assembly of the company.
The Capital Markets Boards (the “CMB”) regulated the principles of share buyback for listed companies whose shares are traded on the Istanbul Stock Exchange (the “ISE”) through its resolution dated 10 August 2011 and numbered 26/767 published in the weekly bulletin of the CMB numbered 2011/31. Pursuant to this principle resolution of the CMB, a company whose shares are traded on the ISE may authorize their board of directors for buyback of the shares traded on the ISE, provided that the acquired shares do not exceed 10% of the issues/paid-up share capital and that such shares will be held in its possession for a maximum period of three years[ii]. The assets of the company may not be less than the share capital of the company together with the un-distributable reserves, after deducting the repurchased share price. The resolution regulates the timeframe of the buyback transactions, which situations necessitate public disclosure of special events and the content of such disclosures in detail.
Although this resolution of the CMB enables the share buyback transactions of listed companies on the ISE prior to the entry into force of the New TCC, the validity of this resolution is disputable to the extend that applying resolution would supersede the main legislation. The CMB has permitted a transaction, prohibited by the TCC and not expressly allowed under the Capital Markets Law through a principle resolution. Nevertheless, the regulatory provisions shall be in compliance with the law; and in the event of controversies or inconsistencies, the provisions of law, which has a higher ranking in the norms hierarchy, shall be applicable. Especially bearing in mind that transactions violating the share buyback prohibition under the TCC are null and void, this principle resolution of the CMB is borne to serious problems. There is a risk that the CMB principle resolution constitutes a violation of the TCC other than the exceptions regulated under article 329 of the TCC and the transactions based thereon are null and void[iii].
The New TCC Regime
The New TCC regulates the possibility for a company to buy back its own shares in the article 379 and the following articles. The justification of the New TCC states that the source for these articles was the Second Company Law Directive 77/91 of the European Economic Community. Below isan overview of the situations where the companies may buyback or accept pledges on their shares pursuant to the New TCC.
Pursuant to article 379, a company may buy back or accept pledges on its shares in exchange for a consideration as long as the total amount of offered shares do not exceed 10% ofits share capital or issued capital. Acquisitions made by third persons on behalf and account of the company and acquisitions of subsidiary companies shall be taken into consideration in calculation of this percentage.
The company may authorize the board of directors for a maximum term of five years in order to realize transactions by determining the total number of, total nominal value of and the maximum and minimum amount, which may be paid for such shares[iv]. Thus, the general assembly is granted an opportunity to exercise control on the buyback[v]. After deduction of the repurchased share price, the assets of the company shall be at least equal to the sum of the share capital or the issued capital and the un-distributable reserves pursuant to the law or the articles of association. The repurchased share pursuant to this article must be totally paid up. In order to circumvent any concerns with respect to protection of the capital, article 388 expressly provides that a company may not subscribe to pay its own shares.
Article 381 regulates the share buyback not subject to the general assembly authorization decision, which is one of the conditions under article 379. Pursuant to this article, the board of directors may buy back shares in order to circumvent a serious and probable loss, without an authorization. Nevertheless, the board of directors shall inform the company in the first following general assembly meeting with respect to the purpose of this purchase, total number of shares and total nominal value of the shares bought back as well as their percentage to the share capital, the total amount paid and the conditions of payment.
Under article 382, the exceptional cases where the company may buy back its shares without being subject to the conditions and restrictions set forth above have been regulated, which is similar to article 329 of the TCC. These exceptional cases are the share buybacks of the companies for capital reduction, as a result of transactions involving the transfer of business as a whole, in order to collect a receivable from execution proceedings or levied by security companies.
Lastly, article 383 foresees that a company or its subsidiary will be immune from the tern percent threshold band as long as such purchase is made without paying any consideration (gratuitous).
The New TCC article 389 has a provision similar to the provision in the TCC with respect to the consequences of share buyback of a company on the shareholder rights. Such shares (bought back) shall not be taken into consideration in the calculation of general assembly quorums. Apart from the repurchased shares gratuitously pursuant to article 383, the repurchased shares shall grant no shareholder rights to the company.
In addition to enabling the share buyback of a company, the New TCC introduces the prohibition of financial assistance under its article 380 in order to prevent bypassing the relevant provisions governing buyback. Pursuant to this article, which should be specifically analyzed, a company may not enter into transactions related to providing a prepayment, loan or security to a third persons in order for such third persons to acquire shares of the company; such transactions shall be null and void.
Disposing of the Repurchased Shares
Pursuant to article 329 of the TCC, repurchased shares for the capital reduction shall be immediately cancelled and repurchased shares under other circumstances shall be disposed of in the earliest convenient opportunity. There is no provision, governing disposal of repurchased shares in violation of this provision, as such transactions are deemed null and void. The principle resolution of the CMB regulates that repurchased shares in accordance with this resolution shall be disposed of within three years; whereas repurchased shares in excess of the ten percent threshold band of the share capital must be disposed of within six months.
As per the New TCC, there is no obligation regarding the dispose of all of the repurchased shares as long as the buyback is executed in compliance with law. The obligation of disposal regulated under article 384 is applicable solely to the repurchased shares in excess of the ten percent of the share capital. Pursuant to this article, repurchased shares in the exceptional cases numbered under article 382 (apart from the share capital reduction where the bought back shares are destroyed) and shares gratuitously as per article 383 shall be disposed of in the earliest opportunity which does not result in the company incurring any losses and at the latest within three years.
Article 385 regulates the consequences of share buybacks in violation of the provisions of articles 379 and 381. The repurchased shares in violation of law shall be disposed of, or pledges established thereon shall be removed within six months. Although it has not been expressly regulated under the New TCC, it may be deduced from this article 385 that buyback transactions in violation of law are valid. Contrary to article 329 of the TCC, the New TCC has not contemplated that buyback transactions shall be null and void if they are in violation of the provisions set forth hereinabove[vi]. To the contrary, it has been foreseen that such shares will be disposed of, therefore it has been accepted that a company may acquire its shares by violating these provisions.
The TCC has prohibited and declared the share buyback of companies null and void, save for certain exceptions. It is disputed whether public companies may or may not buyback their shares traded on the ISE as per the principal resolution of the CMB dated 10 August 2011, would involve share buyback prohibition set forth under the TCC.
The New TCC has introduced an important reform by enabling the companies to buy back its shares through authorizing its board of directors for acquisition of shares not in excess of 10% of the share capital. Furthermore, the board of directors may realize such transactions without any authorization in the eventthere is a risk of a serious and probable loss to be incurred by the company. The possibilities for the company to buy back its shares in exceptional cases such as capital decrease or total transfer of assets or gratuitous acquisitions have been preserved.
As it has been discussed in detail above, to cope with any loophole breakdown of share buyback provisions, financial assistance in acquisition financing transactions has been prohibited and nullity and voidance of such transactions have been taken along subsequently.
[i] See Prof. Dr. Ünal Tekinalp, Yeni Anonim ve Limited Ortaklıklar Hukuku ile Tek Kişi Ortaklığının Esasları, 2. Bası, İstanbul, 2011, par. 9-18 to 9-21; Dr. Alihan Aydın, Anonim Ortaklığın Kendi Paylarını Edinmesi, İstanbul, 2008, p. 66 onwards, for the advantages and disadvantages of share buybacks.
[ii] It may be seen that the CMB has taken the draft of the new TCC as a basis to this principle resolution. Please see Yrd. Doç. Dr. Hayrettin Çağlar, Türk Ticaret Kanunu Tasarısına Göre Anonim Şirketin Kendi Paylarını İktisap Etmesi, Kazancı Hakemli Hukuk Dergisi, www.doktrinbank.com for further details.
[iii] Please see Prof. Dr. Veliye Yanlı, Doç. Dr. Gül Okutan, Şirketin Kendi Paylarının İktisabına İlişkin 10.08.2011 tarih ve 26-767 sayılı SPK İlke Kararının 6762 Sayılı TTK Çerçevesinde Değerlendirilmesi, 10 Şubat 2012, Arslanlı Bilim Arşivi, www.arslanlibilimarsivi.com stating that the CMB principle resolution is in violation of the law to the extend it exceeds the scope of the provision under article 329 of the TCC and that the share buyback transactions shall be null and void and acquisitions of third parties acting in good faith shall not be preserved.
[iv] The justification of the article further states that the general assembly may delimit the authorization for entering into buybck transactions to a specific cause.
[v] Prof. Dr. Ünal Tekinalp, ibid., par. 9-29.
[vi] See Dr. Alihan Aydın, ibid., p. 313 onwards for discussions on the consequences of violating the mandatory provisions under article 379 and the following articles.