Financial assistance prohibition under the new Turkish commercial code
March 2013 | EXPERT BRIEFING | CORPORATE LAW
The Turkish business community awaited the New Turkish Commercial Code numbered 6102, which was eventually put into force on 1 July 2012 (the ‘New TCC’). On the road to EU membership, Turkey was in dire need of modern legislation that complied with EU legislation. The steady growth of the Turkish economy gave rise to different needs for the country’s commercial and legal systems. Along with numerous areas not discussed within the scope of this article, a strict prohibition in relation to financial assistance was introduced through Article 380 of the New TCC.
This article aims to provide information regarding the changes – in other words, the ‘prohibition’ – placed on acquisition finance and the outcomes of this which arise in practice.
Novelties with regards to share buy-backs and financial assistance prohibition
While Article 329 of the previous Turkish Commercial Code numbered 6762, only regulated certain exceptions to share buy-backs or acceptance of pledges over company shares, the New TCC, via Article 379, introduced a new perspective on share buy-backs. As per the new Article, joint stock companies are allowed to buy back their shares, directly or indirectly through third persons, provided that they do not exceed 10 percent of the share capital. Following this reform, the legislative introduced a further step of regulation in the form of Article 380 of the New TCC, in order to prevent companies from circumventing such provisions.
With the enactment of Article 380, acquisition financing for mergers and acquisitions in Turkey has now become a new challenge for investors who would like to enter the Turkish market.
Pursuant to Article 380(1) of the New TCC, legal transactions concluded by a target company, the subject of which is granted an advance, loans or security for the purpose of the acquisition of the target company’s own shares by a third-party are deemed as null and void. However, the same Article brings forth two limited exceptions to this strict prohibition. The first exception is that the referred prohibition shall not apply to transactions contemplated by banks and financial institutions with regards to their ordinary course of business. The second exception applies to transactions in which shares are acquired by or for employees of the target company and its subsidiaries. In any event, the above stated exceptions must not decrease the legal reserves of the company and must comply with the relevant articles of the New TCC in relation to legal reserves to be set aside and to be used (Articles 519 and 520 of the New TCC.). In light of the foregoing, one may conclude that these exceptions are not relevant to M&A acquisition financing.
The new system introduced by Article 380 of the New TCC is based on Article 23 of the Second Council Directive of the European Economic Community numbered 77/91 and dated 13 December 1976 (the ‘Directive’), to a degree that could be considered almost a direct translation. Articles 18-24a of the Directive regulate in detail the acquisitions of joint stock companies to acquire their own shares. Following its date of introduction, problems relating to financial acquisitions began to surface in European countries subject to the Directive. To overcome these problems, the Directive was revised and an amended Directive published on 6 September 2006.
Although the new Directive provides more flexibility to public and private companies, Article 380 of the New TCC still maintains the rigid form of the first regulation, which was widely criticised by scholars.
What has the new regulation brought up in practice?
There are possible ways around the prohibition when structuring proposed transactions. One of the first proposals that comes to mind is having a limited liability company provide financial assistance. In other words, as Article 380 sets forth the prohibition for joint stock companies, limited liability companies may provide financial assistance in a contemplated project. Since the strict prohibition regarding financial assistance applies to both private and public joint stock companies, the credit ratios of banks and financial institutions, together with their financial stability, may be adversely affected, such that the M&A market may decline drastically and foreign investment into Turkey may be severely restrained.
Another option could be to merge with the target company after the proposed share purchase. In practice, the buyer company, which is incorporated as a special purpose vehicle (SPV), merges with the company subject to the share purchase after the proposed share purchase acquisition. With this engagement, the company in which the guarantee is granted merges with the company which is the credit debtor. As a result of this transaction, the assets of the target company will become assets of the SPV. That said, banks and financial institutions should closely scrutinise the financial assistance process to overcome any risks which may arise during completion of the merger. The New TCC has not regulated any specific provisions in relation to such mergers.
According to recent surveys, almost 50 percent of M&A transactions are financed by banks. However, the rigid approach of the new regulation is expected to narrow the practice of banks and financial institutions providing financial assistance. As a consequence, investors may look elsewhere when deploying their capital, towards countries that offer financial flexibility in their legislation. By enacting prohibition that is not based on the latest amendment to the Directive, the New TCC will undoubtedly be deemed as a step backwards on the road to EU membership and required legislative harmonisation with the EU.
Filiz Toprak Esin is a senior associate and Görkem Bilgin is an associate at Mehmet Gün. Ms Esin can be contacted by email: firstname.lastname@example.org. Mr Bilgin can be contacted by email: email@example.com.
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Filiz Toprak Esin and Görkem Bilgin