Ercüment Erdem Att. Nezihe Boran

Communiqué on the Principles of Abolishing Privileges

January 2020

Introduction

According to Article 28 (Privileged Shares) of Capital Markets Law No. 6362[1] (“Capital Markets Law”), as per the principles determined by the Capital Markets Board (“Board”), the Board may abolish priviledges regarding voting rights and representation on the board of directors of a publicly held company that has suffered losses for five consecutive years according to its financial statements. Despite the fact that the aforementioned regulation has been in force since the effective date of the law, i.e. 30 December 2012, the Board has not enacted any regulation regarding the procedures and principles to be followed. Within this scope, the Board prepared the Communiqué on the Principles of Abolishing the Priviledges on Voting Rights and Representation on Boards of Directors (II-28.1) (“Communiqué”). The Communiqué  entered into force through its publication on the Official Gazette on 10 January 2020. This article will mainly focus on the scope of the procedures and principles related to the revocation of the priviledges detailed under the Communiqué.

The Purpose and Scope of the Communiqué

The purpose of the Communiqué is to regulate the procedures and principles relating to the removal of the priviledges for the voting rights and representation on the boards of directors of publicly held companies that have suffered losses for five consecutive years according to its financial statements prepared in line with the legislation. The priviledges that fall within the scope of the provision have further been defined under the Communiqué. Pursuant to the first paragraph of Article 479 (Shares with Voting Right Priviledges) of the Turkish Commercial Code[2] (“TCC”) voting right priviledge means providing different amounts of voting rights to the shares with the same nominal value. Moreover, the definition of the priviledge regarding representation on boards of directors as per the first paragraph of Article 360 (Representation of Specific Groups in the Board of Directors) of the TCC has been referred to under the Communiqué, as well. Accordingly, a representation right on boards of directors may be granted to specific share groups, to the shareholders that constitute certain groups as per their features of qualifications and minority standing. The shares granted by such rights would deemed to be priviledged shares.

If priviledged shares are held by public institutions or organisations, then the provisions of the Communiqué or the Capital Markets Law shall not apply to those shares. In accordance with Article 10 (Exemption) of the  Communiqué, if only a certain part of the priviledged shares are held by public institutions or organisations, then the provisions of the Communiqué or the Capital Markets Law shall not apply only for such shares, and the priviledges over the other priviledged shares may be abolished through a Board decision.

Removal of Priviledges

As per the Capital Markets Law and the Communiqué, the priviledges for the voting rights and representation on the board of directors of publicly held companies that have suffered losses for five consecutive years according to its financial statements, and prepared in line with the legislation, may be removed through a Board decision.

Reasonable and Mandatory Situations

If the actions that have given rise to the losses suffered for five consecutive years according to its financial statements have originated due to reasonable and mandatory events, then the priviledges may not be abolished. As per Article 6 (Exception due to the Activities that incurred due to Reasonable and Mandatory Situations) the publicly held companies that have suffered losses for five consecutive years, may communicate the reasons related to the reasonable and mandatory situations pertaining to the entire five accounting period, or in each of such periods, to the Board within 20 business days following the announcement of the financials of the fifth accounting period to the public. The Board will then evaluate the respective reasonings. During such evaluation, the Board will consider the unfavourable cases that may have affected the economy, sector or the company, and which are not under the control of the shareholders’ management. The approach of the Board concerning the financial difficulties that the companies are in due to the recent economic events, will be important for the application of such rule.

Initiation of the Time Period

The respective five consequtive years will be counted as of the first accounting year staring from the subsequent year, in which the company has been publicly withheld. For the companies that were publicly withheld at the time where the Capital Markets Law has entered into force the Provisional Article 1 (Transmission Period) of the Communiqué will be applied. Accordingly, the respective five consequtive years will initiate from (i) the accounting year ending on 31 December 2013 for those publicly withheld companies with their their fiscal year the same as the calendar year; or (ii) the special accounting year ending in 2014, for public companies with special accounting years.

Financial Statements

Pursuant to Article 5 (Priciples for the Financial Statements) of the Communiqué, if the company is subject to an independent audit, then the financial statements to be taken into account while determining the losses should be the financial statements that are announced to the public, and which have been audited. In respect of the public companies that are required to prepare consolidated financial statements, then those consolidated financial should be taken into account. Otherwise, i.e. for the companies that are not obliged to prepare consolidated financial statements, solo financial statements will be evaluated. It is further clarified that the loss for the financial year under the consolidated statements refers to the “loss by the parent” or, on the other hand, with respect to the solo financial statements, the loss for the financial year means the loss for such financial year.

Consequences of Removal of Priviledges

Takeover Bid Obligation upon Occurrence of Change of Control

It is mandatory to offer a takeover bid in a way to secure all the shareholders that held the shares of the target company if, among others, management control has been obtained through purchasing all, or a certain part of, the shares of the target company by a person or persons acting in concert, as per the Communiqué on Takeover Bids (II-26.1)[3]. If, following the Board decision on the removal of the priviledges on voting rights and/or representation on the board of directors, the management control has been obtained through the ownership of 50% of the voting rights in such company, the controlling shareholder will not be obliged to make a takeover bid to purchase the shares of the other shareholders. Therefore, a change in the management following removal of the priviledges will not give rise to a takeover bid obligation.

The Procedure to be Followed Upon the Board Decision for the Removal of the Priviledges

If the Board has decided to abolish the priviledges, such priviledges cannot be used as of the date of the Board decision, and the provisions of the articles of association of the company that are to the contrary cannot be applied. In this respect, an application to the Board regarding the amendment of the articles of association of such company should be submitted, at the latest, within two months following the notification of the Board decision to the respective shareholder, and it is mandatory to insert an item for the amendments to the articles of association that have been approved by the Board on the agenda of the first general assembly meeting.

If an application to amend the articles of association have not been submitted to the Board within the specified period, or the amendment of the articles of association have not been added to the agenda of the general assembly meeting, the Board may add the respective item onto the agenda in order to ensure that the amendment of the articles of association has been negotiated in the general assembly.

The regulation under the Communiqué is related to the removal of the priviledges for the voting rights and the representation in the board of directors. Such regulation does not enable the Board to appoint trustees and/or board members.[4]

It is not possible to gain any benefit from the removal of priviledges. The Board will inform the Central Securities Depository in order to ensure that such shares have been coverted into shares without priviledges. The Board will further notify the Ministry of Commerce in order to prevent any utilisation of priviledges.

Responsibility

As per Article 11 (Responsibility) of the Communiqué, the board of directors of the companies will be liable in respect of compliance with the procedures and principles regulated under the Communiqué. Upon removal of the priviledges through a Board decision, the general assembly is under the obligation to decide upon whether or not to accommodate the articles of association with the actual situation.

Conclusion

The Board has enacted the Communiqué in order to regulate the procedures and principles relating to the removal of the priviledges for the voting rights and representation on the board of directors (save for reasonable and mandatory situations of the activities under the Capital Markets Law) of publicly held companies that have suffered losses for five consecutive years according to its financial statements, prepared in line with the legislation. One of the recent principles under the Communiqué is that while evaluating reasonable and mandatory situations, it will consider any unfavourable instances that have affected the economy, sector or the company, and which are not under the control of the shareholders’ management. If the Board decides to abolish the priviledges, such priviledges cannot be used as of the date of the Board decision, and the provisions of the articles of association of the company that are to the contrary cannot be applied. The company should submit an application to the Board in order to amend its articles of association within two months, and such item should further be added to the agenda of the first general assembly meeting.

 

[1] Capital Market Law No. 6362, OG No. 2851330, 12.2012.

[2] Turkish Commercial Code No. 6102, OG No. 27846, 14.02.2011.

[3] Communiqué on Takeover Bids (II-26.1), OG No. 28891, 23.01.2014.

[4] Announcement of the Capital Markets Board dated 10 January 2020 (Access date: 28 January 2020).