Financial Assistance Prohibition
"Financial assistance" refers to the assistance given by a company to a third party for the purchase of its own shares or the shares of its holding companies. In Turkish Commercial Code numbered 6102 ("TCC"), such assistance is prohibited in many jurisdictions. In Turkish law, prohibition of financial assistance has been introduced by under Article 380. This article has been titled as "Evasion of Law" because Article 380 has been instated to prevent bypassing the limitations in relation to buyback own shares of a company stipulated in Article 379 of the TCC. For clarity, Article 379 stipulates that a company cannot acquire and accept as pledge its own shares in return for consideration at an amount of which exceeds or will exceed as a result of a transaction, one-tenth of its principal or issued capital. In order to prevent the circumvention of the prohibition for the companies to acquire their own shares, Article 380 of the TCC stipulates that legal transactions performed by company with a person for advance, loan and security for the purpose of the acquisition of shares shall be null and void.
As stated in the preamble of the Article 380, all the transactions that will enable the use of the company's capital for the purpose of financing of the acquisition of shares shall be within the scope of this provision. The preamble of this article states also that such transactions will be deemed as an indirect buyback of companies own share.
Consequences of the Breach of the Financial Assistance Prohibition
Article 380 of the TCC prohibits all legal transactions performed by company with a third person for advance, loan and security for the purpose of the acquisition of shares. As per Article 380, such transactions shall be null and void.
It must be noted that two transactions are mentioned in the event of financial assistance; the share transfer and the financial assistance for the payment of the share.
Since Article 380 only regulates that the financing shall be null and void, the share transfer shall continue to be valid and binding. Let's assume that company A is the target company and a SPA (share purchase agreement) shall be entered into by and between the shareholder B of company and the buyer C. In the event that the buyer C takes a loan out and the Company A is the guarantor for the debts of the buyer C, the transaction of the share transfer shall be valid and binding, nevertheless the warrant transaction shall be null and void within the scope of Article 380.
Exceptions to The Financial Assistance Prohibition
There are two exceptions to the prohibition of providing financial assistance to third parties:
- The transactions within the scope of activity field of lending and financial organizations, and
- The transactions performed by company to give advance, loan and security to be acquired by employees of said company or its subsidiaries.
However, these exceptional transactions shall be null and void in the case that (i) they reduce the reserves which the company is obliged to allocate according to TCC and the articles of associations, (ii) they violate the rules in article 519 regarding the expenditure of legal reserves, and (iii) they make it impossible for the company to allocate the legal reserves stipulated under article 520.
Furthermore, a regulation which is executed between the company and a third party and grants third party the right to acquire the own shares of company in account of the company, its subsidiaries or another company that the majority shares are possessed by the company, shall be null and void in the event that the transaction is deemed a violation to article 379 of the TCC.
Article 380 of the TCC significantly affects the "leverage buy-out" transactions because according to this method, the Buyer acquires the shares of company in such a manner that shall take the control over the company and the considerable amount of the share price is financed by third party loans. The amount of the loans is also secured by the target company's assets. Following the enactment of Article 380 of the TCC, leveraged buy-out method may also be considered within the scope of the financial aid prohibition.
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.