(This article was first published by Dünya Executive)
Under the former Turkish Commercial Code, only public companies were permitted to acquire their own shares. The Turkish Commercial Code entered into force in 2012 allowed share buybacks also for private companies, subject to certain conditions and limitations. However, the share buyback's implementation in private companies is still grey area for Turkish companies.
In a share buyback, the company acquires its own shares from its shareholders in return of a consideration. But, why would a company buy back its own shares? Although it may seem unconventional for a company to buy its shares back and return the shareholders' investments, share buybacks may create or boost share value of the company in different ways.
A company may buy back its own shares to benefit from share valuation. The company can repurchase some of its shares at a reduced price and then re-sell them once the share value increases. Therefore, by using the buyback, the company increases its equity capital without issuing any additional shares. The other reason would be paying off the shareholders without making a dividend distribution. Shareholders expect to receive dividends in return of their investments in the company and buying back some or all shares can be a way for the shareholders to access to the company's profits without awaiting the actual distribution. Another reason would be strengthening the management. Each share represents one right to vote at the company's general assembly meeting and the company may reduce the number of votes at the general assembly meetings by buying back its own shares.
While a share buyback would provide benefits to the company, the Turkish Commercial Code applies strict limitations on this mechanism. First, the company can only buy back shares up to 10% of its share capital, which are fully paid-in. There are limited circumstances in which the company may buy back shares exceeding 10% of its share capital such as share capital decrease, transfer of assets through merger, spin-off or inheritance, but the company must dispose of such shares as soon as practically possible and no later than three years after the acquisition date.
In addition, to perform a share buyback, the company must have at least two shareholders; the company should not be converted into a single-shareholder company because of the buyback. Second is that the company must financially be capable to perform a buyback. When the company pays the consideration to buy back the shares, the total value of the company's remaining net assets must be at least equal to the sum of its share capital and statutory reserves. In other words, the company must have sufficient assets to perform a buyback. Furthermore, the company must allocate reserves in the amount equal to the buyback price. The allocated reserves are only released when the company sells or cancel those bought back shares. It is worth noting that the share buyback is subject to different regime for public companies under the supervision of the Capital Markets Board of Turkey.
The general assembly of shareholders must authorize the board of directors to take any action with respect to the share buyback. However, this authorization is also subject to certain limitations. The general assembly of shareholders may authorize the board for a maximum five-year period and must determine in its authorization, the upper and lower limits of the buyback price and number of shares to bought back. The board of directors, as the main responsible corporate body to perform the share buyback, must state in each authorization request, that all conditions for the buyback are duly met. Another aspect to consider is the buyback price. The buyback price must be based on the market value of shares and other objective criteria. Otherwise, the board of directors is held liable for damages. Shares bought back by the company do not grant any shareholding right thus, the voting rights attached to such shares cannot be exercised at the general assembly of shareholders. Therefore, such shares are not taken into consideration in the calculation of a general assembly meeting and decision quorum. All the foregoing restrictions apply if a subsidiary acquires the shares of its parent company.
Once the company buy its shares back, it may retain such shares for unlimited period. However, if the company performs a buy back without complying with the foregoing criteria, although it is arguable how effective this remedy would be, it must dispose of such shares bought back without meeting the conditions within six months after the buyback date.
The Turkish Commercial Code, while allowing the share buyback for private companies, sets out certain conditions, which obliges the company to protect its equity. The shareholders' investment in the company constitutes the principal asset of the company and provide security to its creditors. Return of the company's share capital to the shareholders without being subject to any limitations as a buyback price would reduce the company's free reserves and thus, harm both the company's assets and its creditors' interests. Therefore, all restrictions set out in the Turkish Commercial Code serve for the protection of the company's assets.
The share buyback may be useful for companies to boost their share value if it is performed in accordance with the conditions set out in the Turkish Commercial Code. We expect that more investors will benefit from this tool in private companies. On the other hand, the implementation will bring new questions to address, such as to whom the shares may be sold, whether the shareholders have preemption rights in the disposal of these shares, or the company will provide warranties under the sale agreement.
© Kolcuoğlu Demirkan Koçaklı Attorneys at Law 2017
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.
