Share Buy-Back by Listed Corporations
Turkish Commercial Code numbered 6102 (“TCC”) regulates the principles for joint stock companies to buy-back its own shares and accept pledges through Article 379 and its following articles, while the Capital Market Law (“CML”) numbered 6362, communiqués and decisions of the Capital Markets Board (“CMB”) set out the rules for publicly held and listed corporations. Furthermore, in cases where there is no provision in capital market legislation, TCC Art. 379 and the following articles shall be applicable to the extent they comply with the capital market legislation. The legal process that shall be pursued by listed corporations on shares buy-back will be discussed on this article.
Communiqué on Buy-Back Shares
Pursuant to Art. 22 of the CML, the Communiqué on Buy-Back of Shares numbered II-22.1 (“Communiqué”) sets down the procedures and principles pertaining to acquisition or accepting as pledges of shares by listed corporations, disposal or redemption of shares bought, disclosure of these transactions, and situations when the acquisitions are not considered as insider trading or manipulation. The provisions of the Communiqué are applicable, also in the case of purchase of corporation’s shares by its subsidiary or by a third party acting in his own name, but on the corporation’s or its subsidiary’s behalf.
Buy-Back Conditions
Firstly, the acquisition limit is 10% of the company’s capital. Within this limit, the authorization of the board of directors by the general assembly is essential for the company to be able to buy-back its shares. The said authorization is given through an approval in the general assembly meeting of a buy-back program prepared by the board of directors. The board of directors may delegate such authorization to natural persons or legal entities. In practice, this authorization is mostly delegated to the financial affairs department or investor relations units or intermediary institutions.
Pursuant to Art. 5 of the Communiqué, which is drafted in line with Art. 381 of the TCC, in order to prevent an imminent and serious loss to the corporation, listed corporations may acquire their own shares also by a decision of the board of directors. Examples of an imminent and serious loss are defined on the preamble of Article 381 of the TCC, as follows; inability to collect debts from a debtor who is heavily in debt due to inability of the corporation to buy its own shares back, sudden sharp drops in stock-prices, or the possibility of a sudden sharp drop in stock-prices, the change of the controlling shareholder, or the possibility of a change in this direction.
Thus, the total acquisition value of buy-back shares cannot exceed the total amount of funds that may be subject to profit distribution. The policies that may prevent profit distribution were precluded by this regulation that was introduced to protect the investor. Although the rule gives the impression that the share buy-back cannot be done by companies at balance sheet losses at first glance, it is, of course, possible for such instances as well.
Lastly, in accordance with Art.379/3 of the TCC, after the prices of the shares to be acquired are deducted, the company’s remaining net assets must be at least equal to the sum of paid-in capital and the reserves that may not be distributed according to law and articles of association[1].
A listed corporation’s subsidiary may acquire the corporation’s shares only if and when the buy-back program is approved in the general assembly of the listed corporation, and the board of directors of the subsidiary takes a decision of acquisition within the frame of the said program. In other words, the requirement of a general assembly decision regulated in the TCC does not apply to the subsidiary, unless the subsidiary is also a listed corporation, then the said subsidiary may acquire the shares of the corporation being its parent company, only if and when the buy-back program is approved also by the general assembly of the subsidiary.
Buy-Back Program Content Requirements
Pursuant to Art. 8 of the Communiqué, a buy-back program to be prepared by the board of directors and to be submitted to the general assembly for approval should contain the following information:
- Purpose of buy-back
- If any, duration of buy-back program
- Maximum number of shares to be acquired
- That the program will be terminated when the maximum number of shares to be acquired is reached
- Proportionate or fixed lower and upper price limits determined for to-be-acquired shares by indexing to a particular indicator, and in the case of transactions requiring correction of the price, how such transactions will be taken into consideration
- If determined, disposal principles of buy-back shares throughout the program
- Total amount and source of the fund set aside for acquisition
- Number, and ratio to capital, of the buy-back shares and not disposed of yet and, if any, results of the previous program
- Explanations on probable effects of buy-back program on the corporation’s financial situation and on the results of its activities
- Information on subsidiaries, if any, which may acquire shares under the program
- Information on the highest, lowest and weighted average share prices of the last year and the last quarter
- Benefits to be obtained by related parties, if any, from this transaction.
Public Disclosure Requirement
The Communiqué regulates the public disclosure requirement in Art. 12 which provides that:
- The buy-back program prepared by the board of directors is announced by a public disclosure to be published by the corporation no later than three weeks prior to the date of the general assembly meeting, and is concurrently published in the corporation’s internet website.
- If and when the general assembly makes a change or revision in a buy-back program submitted for approval, the revised program is announced by a public disclosure to be published in the first business day following the date of the general assembly meeting.
- Decisions of authorized bodies to be taken pursuant to the second paragraph of Art. 5 of this Communiqué are required to be announced by a public disclosure.
- Two business days prior to commencement of acquisition transactions pursuant to and under the program, the corporation and/or its subsidiary makes a public disclosure containing such information such as starting and ending dates of the scheduled period of buy-back, and the nominal value and ratio to capital of the to-be-acquired shares.
- Before the start of the session in the first business day following the date of share buy-back, a public disclosure containing information, such as nominal value and ratio to capital of buy-back shares, and transaction price, nominal value of previous buy-back shares within the frame of the program, and privileges, if any, associated with these shares, and transaction date is needed.
- In the case of disposal of the buy-back shares before the start of the session in the first business day following the date of transaction, a public disclosure, containing information, such as nominal value of disposed shares, transaction price, its ratio to capital, ratio of remaining shares to capital, amount of actual earnings/losses, and privileges, if any, associated with these shares, and transaction date is needed.
- Within three business days following the end of the term declared pursuant to (d) subheading, and termination of the program, and completion of acquisitions scheduled under the program or buy-back shares made to prevent an imminent and serious loss, a public disclosure containing the maximum and average prices paid for the buy-backed shares, and cost of acquisition and sources used therein for, and the total number of buy-back shares, and ratio of these shares to capital is needed. If and when the buy-back shares by the corporation and/or its subsidiary are disposed of during the program, then and in this case, in addition, likewise, information such as the total nominal value of disposed shares, and the total amount of earnings/losses and average sale price, and privileges, if any, associated with traded shares, and transaction dates are disclosed. Such information as a summary of transactions executed within the frame of the buy-back program is also presented to the shareholders in the next meeting of the general assembly.
- With respect to buy-back transactions to be executed in order to prevent an imminent and serious loss:
- At least two business days prior to the starting date of acquisition transactions, the corporation makes a public disclosure stating that shares will be acquired, and showing the purpose of such acquisition, the number of shares to be acquired, and the maximum amount to be paid,
- Public disclosures are made as required during acquisitions and upon completion of the acquisitions,
- The information as mentioned in the seventh paragraph, hereinabove, containing the purpose of the acquisition, sources used, and summary of acquisitions, will also be provided by the board of directors to shareholders in the next meeting of the general assembly.
Situations where Buy-Back and Sale Transactions Cannot Be Executed
Buy-back or sale transactions cannot be executed upon the existence of insider information disclosed by the corporation.
Corporations and/or their subsidiaries are not allowed to execute any acquisition or disposal transaction during the period from the date of decision of the general assembly pertaining to capital increases by the corporations in the share capital system, or from the date of decision of the board of directors pertaining to capital increases by the corporations in the registered capital system, to the date of completion of capital increase transactions.
Implementation of the Share Buy-Back Program
Pursuant to Art. 7 of the Communiqué, the duration of a buy-back program approved by the general assembly is a maximum of three years for corporations whose shares are traded on the stock exchange. While Art. 379 of the TCC determined a maximum of five years of an authorization period - this period is foreseen to be shorter in the Communiqué. As per the relevant articles of the Communiqué, the said program will remain in force throughout the maximum duration if no specific period is shown in the buy-back program.
Pursuant to Art. 9/2 of the Communiqué, buy-back shares of corporations whose shares are traded on the stock exchange should be tradable on the exchange, and acquisition transactions should be executed only in the exchange’s market where the corporation’s shares are traded. Thus, it appears that the non-tradable shares held by the controlling shareholder must be converted to the tradable type in order to be subject to the share buy-back. A question remains as to whether the CMB will make it possible to buy back controlling shareholder’s shares with a simple application to the Central Securities Depository of Turkey and, indeed, it appears that this is possible.
Disposal and Redemption of Shares Acquired
Buy-back shares and gratis shares that are acquired due to buy-back shares may be held in possession, indefinitely, providing that the nominal value of buy-back shares does not exceed ten percent of paid or issued capital of corporations that also include the previous acquisitions and total amount of sources which may be subject to profit distribution.
Buy-back shares that are in conflict with the provisions of the Communiqué shall be disposed of within a maximum of one year following the date of acquisition. Shares not disposed of within this period of time are redeemed through reduction of capital. The time limit is specified as six months by Art. 385 of the TCC. The Communiqué, which introduced stricter conditions on buy-back shares became a controversial issue in the doctrine by keeping the period of withdrawal longer than the TCC[2] specifies. The longer period may be defined due to companies trading low volume stocks on the stock exchange.
Corporation’s Obligation to Buy-back Shares Due to Shareholder’s Use of the Exit Right
Shareholders who have attended the general assembly meeting regarding the material transactions as stated in Art. 23 of the CML, and who had a negative vote, and whom have had their dissention recorded in the minutes, shall have the retirement right by selling their shares to the publicly held corporation. The publicly held corporation is obliged to purchase these shares upon the demand of the shareholder based on the average of the weighted average prices formed on the exchange within thirty days starting from the date when the related material transaction is disclosed to the public.
According to Art. 24/2 of the CML, in the event that i) the shareholder has been unfairly prevented from attending the general assembly meeting regarding the material transactions, ii) an invitation to the general assembly meeting has not been made in due form or iii) the agenda has not been announced in due form, the shareholder may use the retirement right, without requiring the condition of being opposed to the general meeting decisions, and having their dissention recorded in the minutes[3].
Current CMB Regulations under the State of Emergency
On July 21, 2016, the CMB announced that publicly held corporations which do not currently have any share buy-back programs may buy their own shares back from the stock exchange without being subject to any limit provided if they publicly disclose the transaction.
On the announcement, it was also stated that the publicly held corporations with a share buy-back program authorized by the general assembly may buy their own shares back from the stock exchange without being subject to any limit, provided if they publicly disclose the trade and duly inform their authorized bodies of this transaction.
Following the announcement on July 21, 2016, the CMB made a new announcement that detailed the first announcement, as follows:
- The regulation in the Communiqué regarding the authorization given by the General Assembly, the 10% limit on the buy-back shares, and the 25% limit on the average of the daily amount of transactions, shall not be applicable until the CMB announces that they shall be applicable again.
- Publicly held corporations that currently exceed the 10% limit may also buy back shares within the framework of the announcement. The limitation on publicly held corporations in the capital increase process shall only be applicable for corporations that are in the process of capital increases via a cash injection.
- No exceptions have been made for buy-backs made by partners, managers, and other persons with internal / pertinent knowledge.
- Before the buy-back, it is necessary to disclose a board of directors’ decision that includes the purpose of the buy-back, the maximum number of buy-back shares, and the maximum amount of funds that may be reserved for this transaction.
- If publicly held corporations that currently have a share buy-back program are willing to take advantage of the opportunities available within the announcement, they may buy shares back with a board of directors’ decision regarding the subject.
- (a), (b), (c) and (d) clauses explained under the subheading of Public Disclosure Obligation shall not be applicable on the buy-back shares made within the framework of the announcement. Two business days of waiting prior to the public disclosure of buy-back shares that were made in order to prevent an imminent and serious loss explained under (h) shall not be applicable.
- Buy-back shares shall not be sold for a period of 30 days from the date of purchase. The “first-in first-out method” shall be applicable in the calculation of 30 days. At the end of the said period, the buy-back shares shall be disposed of within a maximum of three years within the framework of the provisions of Art. 19 of the Communiqué, or related shares may be held for an indefinite period of time if the buy-back complies with the restrictions in the Communiqué[4].
- If disposal of the buy-back shares is willed, the corporation shall make a public disclosure containing such information as the nominal value of disposed shares, transaction price, its ratio to capital, ratio of remaining shares to capital, amount of actual earnings/losses, and privileges, if any, associated with these shares, as well as transaction date, before the opening of the session in the first business day following the date of transaction.
- Buy-back share transactions shall not be considered as insider trading or manipulation.
Global Overview
In the countries following the Anglo-Saxon legal system, such as the United States and the United Kingdom, share buy-backs are more free and widespread, and are often seen as an extension of the non-dividend cash payments and capital repayment policy. The reason behind the share buy-back may be increasing earnings per share, or the signaling of future cash flows[5].
When the managers believe that their shares are trading below their intrinsic value that does not reflect the actual situation, in order to eliminate the price gap, share buy-backs may show positive expectations. In practice, a sudden increase in the share values of companies that announce their share buy-back programs is frequently seen. However, Apple"s share buy-back made before the stock drop caused the company to lose USD 15 billion. In some cases, announcing buy-backs, instead of new investments, may send a message of fatigue, that management has no new ideas of how to use the cash, other than giving it back to the shareholders[6].
Recently, Facebook announced that they would buy back shares worth USD $6 billion, starting from the first half of 2017, with the authorization of the U.S. Securities and Exchange Commission (SEC), and their share values increased by 1% after the announcement[7]. The reasons why Facebook management resorted to this path despite new investments may be that stock prices are not at an adequate level, or that investors may wish to gain the confidence of investors for new investments to be made in 2017.
Conclusion
In Turkey, especially during the State of Emergency period, share buy-backs are fully liberalized in order to prevent the losses that companies may experience in the stock market[8]. However, it is already a mystery for both companies and investors as to how the regulations on the subject of share buy-backs may take form after the said period.
In recent times, instead of allocating corporation budgets to drive growth, funds reaching 150 million TL[9] have been invested on acquisition of own shares. Although share buy-backs are useful to protect market value, it is open for discussion and up to economists’ analysis as to whether or not it is a suitable method for protecting shares’ real value. Such analysis will also allow us, the lawyers to have a better understanding of the limitations and appropriateness of restrictions by the CMB regulations imposed before and after the State of Emergency period so as to comment on the validity and appropriateness of the regulations.
[1] Please refer to our article for detailed information on buy-back shares of companies pursuant to the TCC: http://www.erdem-erdem.av.tr/publications/law-post/share-buyback-of-companies-pursuant-to-the-new-tcc/ (access date: 30.12.2016).
[2] Please see: Ahmet Türk, Acquisition of Own-Shares in Joint-Stock Companies, Adalet Yayınevi 1. Baskı, Ankara 2016, p. 451-452.
[3] Please refer to our article for detailed information on material transactions: http://www.erdem-erdem.av.tr/publications/law-post/communique-regarding-common-terms-on-material-transactions-and-shareholders-right-to-dissociate-ii231/ (access date: 30.12.2016).
[4] The nominal value of buy-back shares cannot exceed ten percent of paid or issued capital of corporations, also including the previous acquisitions and total amount of sources that may be subject to profit distribution.
[5] For detailed information on the reasons behind the buy-back shares, please refer to: John B. SHOVEN - Laurie Blair SIMON, Share Repurchases and Acquisitions: An Analysis of Which Firms Participate, National Bureau of Economic Research, Working Paper No:2243, 1987. http://www.nber.org/chapters/c2057.pdf (access date: 30.12.2016).
[6] Please see: http://fortune.com/2016/02/02/apple-stock-buyback/ (access date: 30.12.2016).
[7] Please see: https://www.bloomberg.com/news/articles/2016-11-18/facebook-to-buy-back-up-to-6-billion-in-shares-starting-2017 (access date: 30.12.2016).
[8] Please see: http://www.businessht.com.tr/piyasalar/haber/1270174-spk-duzenlemesi-sonrasi-hisse-geri-alimlari-birbirini-izledi (access date: 30.12.2016).
[9] Please see: https://www.kap.org.tr/tr/Bildirim/548083 (access date: 30.12.2016).
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