The debate concerning the use of debt pushdown mechanisms in secured financing of listed company acquisitions has been ongoing in Turkey since the late 1990s. With increasing investment by foreign private equity funds, the scope of this debate could become broader, and cover the use of a target company's assets to secure the financing of an acquisition. This structure involves the acquisition of a company through a special purpose vehicle (SPV), whereby the SPV obtains financing for the acquisition of the target company's shares, and uses the target company's assets to secure the financing.
Often, the acquisition in question entails two phases in respect of listed companies: 1) the initial purchase of shares; then 2) the purchase of more shares through a tender offer. The buyer normally secures the financing of phase one through a pledge over the purchased shares. However, after acquiring the majority of shares in the target company in phase two, it uses the target company's assets as security. As a result, the lenders are provided with sound collateral, while the buyer's assets are not encumbered at all.
The Capital Market Board's (CMB's) approach towards this structure appears to be controversial. Recently, the CMB encountered an unpleasant experience in a deal where a private equity fund backed out due to a lack of financing. According to the public disclosures made by the target company in that deal, a fund that had agreed to purchase the company's shares terminated its share-purchase agreement with the sellers on the ground that it had financing problems caused by economic fluctuations. The CMB reasoned that the financing problems would not have occurred had the financing not been secured by the target company's assets. Reportedly, this experience led the CMB to the conclusion that investors who wish to acquire shares in Turkish companies should secure their own financing instead of relying on the target company's assets as collateral. The CMB's reasoning is that the use of the target company's assets to secure the financing of that company's acquisition puts the minority shareholders in a difficult position.
From a technical point of view, the CMB's jurisdiction over the pledge of a target company's assets is questionable. The CMB's powers and authorities are governed by the Capital Markets Law (the CML) and the Regulation on the CMB's Organization, Authorities and Working Principles (the Regulation). Neither the CML nor the Regulation grants explicit authority to the CMB in connection with encumbrances over the assets of listed companies. The matters for which the CMB's approval is required are, among others, mergers of two listed companies; public offerings; implementation of the registered capital system; and certain changes to the articles of association. So the CMB does not have express authority for approving or disapproving the establishment of encumbrances. However, the CMB has a broader interpretation of its powers and authorities, and this is evident from two principle decrees rendered in 1997.
In March and June 1997, the CMB adopted two principle decrees, preventing the granting of pledges by listed companies for securing the debts of third parties. Then, in March 1998, the CMB overruled these two principle decrees and stated that they no longer applied. Although this means that there are no principle decrees preventing a listed company from pledging its assets for the debts of another company, it shows that the CMB believes that it has the authority to intervene in the establishment of pledges by listed companies.
One regulation that the CMB might consider in this regard is Article 15 of the CML, which requires listed companies to deal with their affiliates and subsidiaries on an arm's length basis. Under Article 15, listed companies cannot decrease the assets and/or profits of their direct or indirect affiliates by applying special prices, fees and tariffs to them. The CMB might adopt a broad interpretation of Article 15 in such a manner that it would be construed as restricting listed companies' ability to use their affiliates' assets for financing purposes.
In this context, the CMB might also resort to Article 3 of the Regulation, which provides that, if a certain matter is not expressly regulated, the CMB may render decisions and regulate or direct the implementation in accordance with the general principles of the CML and the Regulation.
Because the CMB's main duty (as well as its primary concern) is the protection of minority shareholders' rights, a broad interpretation of Article 3 might be upheld. However, the CMB's powers and authorities could be more clearly defined in the CML and the Regulation to prevent any disputes as to whether or not the establishment of encumbrances over listed companies' assets is subject to the CMB's approval. After all, there are no written communiqués preventing a listed company from pledging its property, provided that it discloses this pledge in accordance with the CMB's Communiqué Regarding Public Disclosure of Special Events, Series VIII, No 39.
From a practical perspective, it should not come as a surprise that the CMB might not favour the securing of an acquisition by using the target company's assets. Although some believe that the CMB's powers and authorities are limited, it is evident from the principle decrees referred to above that the CMB has a broader interpretation of its scope of powers.