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Turkey’s financial assistance restrictions

Aslihan Özbey
The Turkish Commercial Code No 6102 (TCC), which was enacted on January 13 2011 and entered into force on June 1 2012, introduced a wide range of new aspects applicable to transactions in Turkey. One of these is the prohibition on share buybacks which also affects financial assistance on acquisition financed transactions.

Article 379 of the TCC enables joint stock companies and limited liability companies to undertake share buybacks not exceeding 10% of their capital, subject to certain conditions such as general assembly approval for granting authority to the board, duration of the authority, determination of price, and compliance with the preservation of legal financial reserves. Transactions which exceed the 10% threshold or which are conducted in breach of the provisions of the TCC will be void and any shares acquired must be either sold within six months of their acquisition or cancelled through capital decrease.

While the provisions regulating the conditions of share buybacks under the TCC do not directly relate to financial assistance, the TCC goes on to prevent, in article 380, a target company from advancing funds, making loans or providing security or guarantees to a third party in relation to the acquisition of its shares. The aim of article 380 was to avoid circumvention of the restrictions on share buybacks; it explicitly states that transactions having this effect will be deemed void. The most important consequence of these provisions, however, is that guarantees and security provided to a bank funding a leveraged buyout or upstream loans provided to service leveraged debt may be void.

The exceptions to this prohibition are transactions which fall under the scope of activities of banks or financial institutions; and advances, loans and security provided to the company's employees or parent or subsidiary's employees in order to acquire the shares of the company which must comply provided that the requirements related to preservation of legal reserves are complied with.

These principles introduced by the TCC have led to banks and advisers having to carefully structure acquisition finance transactions to ensure lenders are fully protected in the market.

Aslihan Özbey

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