|Isil Ökten||Aslihan Kahraman|
Financial assistance prohibition was introduced by article 380 of the Turkish Commercial Code dated June 1 2012 (TCC). The prohibition provides that legal transactions concluded between the company and another person for acquisition of its own shares, the subject of which is provision of advance, loan or security, will be considered void. In practice, we frequently see the following discussions as part of the leveraged buyout (LBO) structures.
Acquisition of 10% of the company's shares. Under article 379/1 of the TCC, share buybacks are possible if it is not exceeding 10% of the capital of the company. It is argued that the provision of financial assistance for acquisition of up to 10% of the shares should be possible.
However, article 379 applies when the acquirer of the shares is the issuing company itself, whereas, article 380 applies when the shares are acquired by a third party. Therefore, even if a company is able to buy its own shares up to the 10% threshold, it is generally accepted that it is not possible to financially assist another party to buy the company's shares irrespective of the amount of shares.
Another query which often comes up is whether the post-acquisition merger between the target and the special purpose vehicle (SPV) falls under the scope of financial assistance prohibition. As a result of the merger, typically conducted upstream, the assets of the target company become assets of the SPV (which is established to acquire target's shares) and therefore the lenders who have provided acquisition loan to the SPV can now have recourse against the assets of the target company.
According to the majority view, mergers are separately regulated by the TCC and there is no need to apply the financial assistance rules to protect the shareholders or the creditors. The TCC's merger rules provide sufficient protection for shareholders and creditors whose rights may be jeopardised by the merger.
As a separate note, the financial assistance prohibition does not apply to companies in the form of limited liability (limited sirket), therefore it is possible to convert a joint stock company (anonim sirket) into a limited liability company, to bypass the application of the financial assistance.
Even though, since the law is new and there is no court precedent on this matter, the scope and implementation of financial assistance prohibition is still a grey area in Turkey, there are ways to structure LBOs using the available legal tools.
Isil Ökten and Aslihan Kahraman
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