Highlights from the new Turkish Capital Markets Act
July 2013 | SPOTLIGHT | CAPITAL MARKETS
Financier Worldwide Magazine
The strong and rapidly growing Turkish economy, undoubtedly seen as a role model by various authorities, has recently been reinforced by a new Capital Markets Act no. 6362 (‘New Act’), which abolished the old Capital Markets Act no. 2499 (Old Act) that remained in force for over 30 years.
The main motivation behind the new legislation was to sustain economic developments by establishing a proportionate, transparent and accountable market. However, the legislative reforms experienced by the Turkish legal system over the last two years has also been driven by the process of making Turkish laws compliant with European Union Acquis (Acquis Communautaire).
The New Act aims to provide an investor-friendly market by catering to investors’ needs with swift responses, together with accommodating alternative financing sources for companies. Although many significant innovations have been brought into force, the New Act still remains a framework law whose implementation will follow the enforcement of secondary legislations which are currently being drafted by the Capital Markets Board of Turkey (CMB). In view of that, this article will briefly touch upon some of the major innovations which have caught the attention of market players.
Registration of capital markets instruments as a mandatory process of public offerings has been abolished and replaced with the offering circular approval system. Accordingly, in order to list capital markets instruments at the stock exchange or to offer them to the public, it is now obligatory for issuers to primarily prepare an offering circular and submit it to the CMB for approval. An approved circular shall then be applicable to all issuances to be made within the 12-month period following the publication date of the circular; thus, procedural repetition shall be avoided and the cost of preparing, approving, registering and publishing circulars will be reduced.
The extent of liable parties and liabilities arising from the preparation of prospectuses, financial reports and independent audits has also been widened. Besides the issuer and stockbrokers, those firms and employees of such firms who prepared reports related to the circulars, the guarantors and board members of the issuer may also be held liable for the damages arising from wrong, misleading or missing information provided in circulars, relative to their fault and to the extent such damages can be imposed upon them. Moreover, board members of the issuer, together with the independent auditor, shall be liable for inaccurate and incorrect preparation and submission of financial statements and reports.
The New Act allows publicly-held companies to issue shares below their nominal values. Accordingly, if the nominal value of the proposed issued shares exceeds the market or book value, such shares shall then be sold at premium. However, if the market value of the shares is less than their nominal value, CMB shall have the authority to allow the shares to be issued at a value below their nominal value. Such regulation aims to prevent price fluctuations and unfair profits, along with financial problems experienced by those companies whose shares are listed with a value less than their nominal value due to the relevant restrictions of the Turkish Commercial Code (TCC).
Substantial requirements have been attached to related party transactions in order to protect the long term benefits for companies and maintain a control mechanism with shareholders. In this regard, before a related-party transaction is concluded, a board of directors’ resolution setting the principles of the transaction must be obtained and passed with the majority approval of the independent board members. In the event that the majority of the independent board members do not approve the resolution, this fact shall be disclosed to the public and the transaction shall be submitted for the approval of the general assembly. During such general assembly meetings, the relevant related parties will not be able to cast a vote in relation to the related party transaction. Any board resolution or general assembly resolution which is not taken in compliance with these principles will be rendered invalid.
The New Act lists, in a non-exhaustive manner, the material transactions of publicly-held companies as including: (i) being a party to mergers, spin-offs or making resolutions regarding change of type or dissolution; (ii) transferring all or a material part of its assets or establishing rights in rem thereon or leasing of such assets; (iii) changing the scope of activity entirely or materially; (iv) granting privileges or changing the scope and subject of the privileges; and (v) delisting. CMB is empowered to designate the criteria for materiality and the procedures and principles for the approval of such transactions. Those shareholders who attend the general assembly meetings in relation to the material transactions but cast negative votes and record such dissenting opinion in the minutes of the meeting will have the right to exit the company by offering their shares to the company in return for a fair consideration. Upon the shareholder’s request, the company shall be obliged to purchase such shares in exchange for the consideration which shall be calculated as the average price per share of the 30-day period ending on the date of the public disclosure regarding the material transaction.
The mandatory tender offer process that was previously regulated under the secondary legislation of the CMB is now taken within the context of the New Act. Accordingly, the New Act, although it does not touch the provisions of the old legislation, explicitly provides that it is mandatory for those shareholders who acquire controlling shares or voting rights in a publicly held company to make a tender offer to other shareholders. Acquiring the shares of a company, directly or indirectly, corresponding to more than 50 percent of the voting rights, alone or with other persons acting in concert, shall be regarded as having control over the management, except in cases where management control could not be obtained due to the existence of privileged shares. Correspondingly, the squeeze out right has also been introduced by the New Act for the first time. If the result of a tender offer or acquisition of voting rights of the publicly-held company reaches a shareholding ratio to be determined by CMB, then those who have made a tender offer shall have the right to squeeze out the remaining shareholders. Such persons may request that the company cancel the minority shares and to sell the new shares to be issued to replace such minority shares. Moreover, if this squeeze out right arises, then at the same, the minority shareholders will also be entitled to a right to put their shares to the acquirer of the majority of voting rights, or to persons who are acting in concert, in return for a fair consideration.
The context of transfer pricing is defined and an explicit prohibition has been introduced with respect to intra-group transfers (e.g., direct and indirect transactions with management and auditing companies) which are not conducted on an arms’ length basis or which include dissimilar price, fee, amount or terms compared to precedents and market practices. In this sense, related party transfers extend to cover earnings as a result of agreements or conducting commercial transactions with real persons or legal entities to which such publicly held companies and their affiliates and subsidiaries are directly or indirectly related in terms of administration, audit or capital. Moreover, it has been particularly emphasised that any inaction by publicly held companies and their affiliates and subsidiaries, conducted in a manner that could not be expected from a prudent businessman, in order to save or increase their own profits or assets which accordingly causes an increase in the profits or assets of their related parties, shall also be deemed a transfer of earnings.
Another investor protection mechanism has been provided with respect to the removal of privileges. CMB is empowered to remove the privileges in relation to voting rights and appointing nominees to the board of directors of those companies who declare a loss during a period of five consecutive fiscal years. Given the fact that most Turkish companies are family-owned businesses with various privileged rights granted to the family members, those unprivileged investors who, past facto, become a shareholder have very little chance to be involved with the management of such companies and to request replacement of its board members in cases of continuing loss. Hence, by means of this provision, such past facto shareholders shall be protected by an external source in the event of losses.
The New Act has also introduced new capital markets institutions and extended the scope of activity for institutions, while moving to a more activity-based mechanism from an institution-based mechanism. In this regard, portfolio management companies are regulated within the context of the EC UCITs Directive. Hence, the incorporation of investment funds will only to be incorporated by portfolio management companies.
Open-ended investment trusts, a combination of an investment fund and an investment trust, is also introduced to the Turkish capital markets. By means of such trusts, investment funds will be able to invest in those sectors (e.g., real estate) which were otherwise previously restricted due to lack of legal personality.
Moreover, the activities of mortgage financing trusts are extended to come into line with housing finance trusts due to the prior restrictions and inefficiency in this respect. Mortgage financing trusts are now allowed to issue all kinds of capital market instruments which can be issued by housing finance trusts. In other words, it aims to grant mortgage financing trusts with the same scope of activities held by credit institutions.
Last but not least, capital market crimes are listed in an extensive manner and penalties are expressly defined for each type of crime. CMB has determined prison sentences and fines for breach of specific provisions by directors of public companies, their affiliates and major shareholders, and persons who illegally used information. Compared to the Old Act, it is clear that the degree of punishments and pecuniary penalties imposed for insider trading and manipulation crimes have grown substantially.
Deniz Altınay is a partner and Fatoş Otcuoğlu is an associate at Pekin & Bayar. Ms Altınay can be contacted on +90 212 359 57 00 or by email: firstname.lastname@example.org.
© Financier Worldwide
Deniz Altınay and Fatoş Otcuoğlu
Pekin & Bayar