Turkey: Prohibition Of Financial Aid Under Turkish Commercial Code

Last Updated: 13 September 2019
Article by Gönenç Gürkaynak Esq, Nazlı Nil Yukaruç, Defne Kahveci and Damla Doğancalı
Most Read Contributor in Turkey, September 2019

I. Introduction

Unlike the former Turkish Commercial Code, the Turkish Commercial Code numbered 6102 ("TCC") implemented a provision that allows joint stock companies ("JSC") to acquire their own shares within certain limits and conditions set forth therein. This provision was adopted from the Second Council Directive of European Economic Community numbered 77/91 and dated 13/12/1946 ("Directive").

As per the limits and conditions defined under the TCC, JSCs can neither grant third parties the right to acquire its shares on behalf of such party and on the account of the JSC nor grant security. Even though the Article derives from the Directive, the main purpose of implementing such restriction arises from Article 379 of the TCC. According to paragraph 1 of Article 379, a JSC is allowed to acquire and pledge its own shares in return of consideration for an amount that does not exceed or will not exceed as a result of a transaction, one tenth (1/10) of its principal or issued capital. Naturally, JSCs would be inclined to evade the 10% (ten percent) limit, for example by granting advance payments to third parties to perform transactions on behalf of the company. In this case, hiding the fact that a third party is acting on the account of the JSC would be deemed as a fraud against the law because provisions in relation to granting financial aid assume that the shares are acquired on behalf and on account of the third party and the JSC is not involved with the transaction. Thus, with the financial aid prohibition provisions, the TCC intends to prevent JSCs from "getting help" from third parties to acquire their own shares and exceed the acquisition limits granted under Article 379.1 In the following sections of this article, financial aid prohibition and the consequences of violating this rule will be explained in detail.

II. Financial Aid Prohibition and Exceptions

The general rule under the first paragraph of Article 380 is that when a JSC conducts a legal transaction with other persons and grants an advance payment, loan or security for the purposes of acquiring its shares, such transaction shall become null and void. We should point out that the Article only restricts financing transactions and not the share transfer itself. Furthermore, the prohibited transactions are not listed as numerus clausus (limited in number); meaning any other financing transaction with third parties for the purposes of acquiring shares of a JSC which does not fall into the exceptions stated under Article 380 (e.g. guaranteeing that the JSC will distribute dividends if the third party acquires the shares or that the JSC will undertake the costs of the acquisition) could also be prohibited. Granting sureties, guarantees, mortgages to third persons for the abovementioned purposes could be given as sample transactions that would become null and void under financial aid prohibition rules.

Furthermore, causing an actual loss or damage to a JSC's assets is not a requirement for a transaction to violate Article 380. Even financing transactions creating advantageous circumstances for the companies could be contrary to the rules if the company provides financial aid to other parties.

Article 380 has granted two exceptions under which the JSCs can procure financial aid without being subject to the prohibition:

  1. If the transaction is within the scope of activity of credit and finance organizations; or
  2. If the legal transaction is related to granting an advance, a loan or security to the JSC's employees or its group companies for the purposes of acquiring shares of such company.

The definitions of credit and finance institutions are included in the Banking Law numbered 5411. Under Article 3 of the Banking Law, credit institutions are divided into two groups; (i) the deposit banks (operating primarily for the purpose of accepting deposit and granting loan in their own names and for their own accounts) and (ii) participation banks (operating primarily for the purposes of collecting fund through special current accounts and participation accounts and granting loans). Finance institutions are defined as the institutions other than credit institutions, which have been established to perform insurance, individual private pension fund or capital market activities, development and investment banks, and financial holding companies. Thus, in the event a third party obtains credit or surety from a credit or finance institution defined under the Banking Law to acquire the shares of a JSC or if the credit or finance institution grants cash or non-cash credit to others for acquiring its own shares (provided that it does not deliver the guarantee of the credit itself), such transaction will be valid.2

Unlike the first exception stated in Article 380, which is applicable only to the transactions within the scope of activity of credit and finance organizations, a second exception is applicable to any transaction regardless of its subject. On the other hand, the TCC does not have a clear definition and scope for the term "employee" referred under Article 380. According to Article 3 of Occupational Health and Safety Law numbered 6331, "employee" refers to real persons employed in private or public workplaces regardless of their status under special laws. For this reason, some scholars argue that any worker, officer, contract personnel and government official should be included in the definition and the term should be interpreted broadly. However, the same scholars also point out that board members or managing directors of the company should not be within the scope of the definition since there is a high chance that people with management powers could use the assets of the company to gain control.3

Nevertheless, under both circumstances, such transactions should not (i) reduce the legal reserves of the JSC which are obliged to allocate as per the law and the articles of association; or (ii) violate the rules stipulated in Article 519 of the TCC, which regulates spending of the reserves; and (iii) should not make it impossible for the JSCs to allocate legal reserves regulated in Article 520 of the TCC. Hence, a transaction will become null and void if it violates any of these three rules, even though such transaction is stated as an exception under the first paragraph of Article 380.

Additionally, as per the second paragraph of Article 380, a transaction between a JSC and a third party shall also become invalid if such transaction grants the right to acquire, on behalf of the JSC, JSC's shares, JSC's affiliates' shares or shares of the companies where the JSC holds the majority shares or creates an obligation for the third party to acquire; and if such transaction would have been declared null and void in the event the JSC acquired such shares contrary to the rules contained in Article 379.

III. Consequences of the Breach

In case the JSC violates the financial aid restrictions and grants an advance payment, a loan or a security to another party, the financial transaction entered into by the parties will become null and void. According to Article 27 of the Turkish Code of Obligations numbered 6098, a contract is deemed as null and void if it is against the mandatory rules, rules of morality, public order, personal rights or contracts where the subject matter is impossible to perform. In such case, any person who has an interest in the transaction (i.e. shareholders, the creditors, JSC itself) can claim the invalidity of the transaction.

Furthermore, Article 385 states that in case the JSC acquires shares contrary to Article 379 or 380, it needs to sell the acquired shares within six (6) months following the acquisition. A special procedure has not been provided under the TCC for the disposal of such shares. However, the preamble of the TCC states that the board of directors of the company is authorized to perform the necessary actions to sell the shares. Thus, it is likely to say that the JSCs which acquire the shares contrary to the financial aid restrictions would be obliged to transfer the acquired shares to others within six (6) months. Otherwise, the JSC has to redeem such shares with capital decrease.4

IV. Conclusion

Article 380, along with Article 379, has implemented a broad restriction for joint stock companies in terms of the acquisition of its own shares and only allowed financial aid if it is within the scope of activity of credit and finance organizations and if the employees of the company are acquiring shares. As a result, this restriction has created a struggle for the JSCs to obtain financing without using the company's own assets, resources or to grant security to others. Furthermore, the fact that there are no precedents by the Court of Appeal in this matter to show guidance to JSCs and lack of consensus between scholars have created additional burden for JSCs because it is not possible to fully to get informed about the risks and consequences they might face. However, by taking into account that the TCC has been enacted in 2012, there is no doubt that there will be new precedents and improvements in the doctrine within the next few years to guide JSCs.

This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in September 2019. A link to the full Legal Insight Quarterly may be found here

Footnotes

1  Poroy, Tekinalp, Çamoğlu, Ortaklıklar Hukuku I 593, (13th ed. 2014).

2  Id. at 594.

3  Arıcı, Veziroğlu, Kaldıraçlı Devralma ve Anonim Şirketin Finansal Yardım Yasağı 50, (1st ed. 2014

4  Hasan Pulaşlı, Şirketler Hukuku Şerhi 1790, (3rd ed. 2018)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions