According to Article 329 of the Code of Commerce (Türk Ticaret Kanunu- hereinafter referred to as TTK) a joint stock company (hereinafter referred to as JSC) shall not acquire or pledged its own shares. In case of violation of this provision, the transaction will be declared null and void. This means that, any agreement concerning to purchase or to pledged these shares also will be invalid. This forbidden includes all types of shares like ordinary, preference, registered or bearer shares. For instance, if a JSC uses its own shares as a payment method for purchasing another JCS shares, in which case it will be contrary to Article 329 of the TTK. Consequently, an agreement with the above mentioned payment option will not be effectual. Equally, a JSC cannot repurchase and retake its own shares after the shares are issued on the Stock Exchange.
However, Article 329 of TTK states the following exceptions:
1. “If the share is acquired due to a decision whereby the share capital shall be reduced; …”
With a view to as stated above, when a JSC acquired its own shares, the JSC cannot take possession of them. The issued shares should be returned to the JSC and immediately destroyed. Also, this proceeding should be recorded and this official paper should be given to the Trade Register Office. In order to protect the rights of the third persons in a good faith, it may be decided to cancel the shares which were not returned by their owners.
2. “If the shares are acquired apart from to found a company or to increase of stock capital when the obligation of participating to the capital was committed; or in order to pay of the companies outstanding receivables arising out of another causes;…”
It is possible that, a JSC may acquire its own shares from its debtors in order to collect its receivables from them. Nevermore, if the JSC have a receivable from the shareholders who have to participate to the capital contribution, these shareholders cannot make payment by their shares.
The Court of Appeal declared in a decision that “the shareholder who rendered his bank shares to the bank instead of payment of his debt …this payment cannot be considered as payment of the debt of the debtor and the occurred acquisition should be considered null and void.”
3. “If shares are acquired by the company as a result of universal succession;”
4. “If shares are acquired or pledged because this transaction is within the subject matter of the JSC in accordance with the Articles of Association;…”
The banks, the financing institutions, the investment companies, the security traders and the other corporations which operate in the stock trading may acquire their own shares. For example, a bank can grant a loan to exchange its own shares which as taken as a pledge.
5. “If the shares are deposited as a pledge by the Board members, managers and employees in order to exchange of their liability in accordance with their title;
6. “If the acquisition occurred without a consideration…”
A JSC can possess its own shares without a consideration. This provision only covers the shares only where the stock costs has been fully paid. For instance, it is possible, only fully paid shares can be owned by the JSC but not unpaid ones. The reason is, when the shares need to be paid, the unpaid ones have to be paid by the JSC. In accordance with the relevant legislation, it is not possible these shares to be paid from the JSC`s capital.
As stated in the Article 329/2, in any aforementioned circumstances, if the JSC owned its own shares, the JSC immediately should realize the shares. Also, according to the Article 329 clause 2, the shares which are returned to the JSC, immediately should be destroyed.
It is not possible that, transition of voting rights which are adherence to the shares cannot be used by the JCS. As provided herein, all acquired shares should be disclosed in the annual report of the JCS.
In spite of the last exceptional case, the realised acquisition may be subject to an allegation which the transaction was collusive or manipulative. In which case, this situation may create a legal problem. In the comparative law, there are many different legal arrangements on purchasing its own shares by a JSC. For example, under the Russian law, a JSC can acquire its own shares according to the company”s resolution or a legal arrangement. However, the Russian Law on the Joint Stock Company also states exceptional articles for this subject.
The purpose of Article 329 of Code of Commerce is not only to protect the capital market but also to protect the receivables of the third parties.
In case of, if a JSC was entitled to purchase its own shares; there may be a risk that the shares would be subject to the speculative agreements. In case of the financial straits, the Directors may also take in money from the capital stock in order to purchase its own shares which would create a factitious increase in the value of the shares.
The Court of Appeal has stated, in a decision, “the JSC cannot purchase its own share” and further declared that“to purchase its own shares by a company is forbidden -…It should have been decided whether there was any reciprocal participation between the joint stock companies and if it was, whether this situation was contrary to the provision of Article 329 of the TTK.”
When we look at the other countries law and regulations with regard to purchase its own shares or to repurchase its own shares (it is called buy-back) is lawful and there are no legal difficulties. To buy or buy-back its own shares by JSC which frequently has been practised in the USA, Russia, Germany, France, Italy, India, Japan and in many countries. This method is considered as an advantageous investment opportunity under these foreign countries” law systems.
As a result of the buy-back method, the amount of shares of the JCS decreases in the stock market. In case of more shares of the JSC are traded in the stock market with less demand will result in a depreciation of its value. In order to prevent the depreciation of the shares values, the JSC may buy back its own shares and eventually the amount of its shares in the stock market will decrease. By this way, the JSC could prevent the lion shares to be purchased by third parties.
Nowadays, the international companies buy-back its own shares in order to prevent depreciation of their shares especially in a recession period. However, under the Turkish law to purchase its own shares is forbidden. Therefore, Turkish companies cannot fight against recession via this method.
Nevertheless, a need of a new regulation on this area was considered in the Draft of the New Code of Commerce. In respect of its relevant articles, a JSC may acquire its own shares up to 10% of its capital in base of an authority which was taken by a resolution at the general meeting. Following that, the Board of Directors should use this right within eighteen months.
The rationale to bring 10% limitation is to prevent a manipulative transaction and the capital market. Thus, the new Code of Commerce implicitly rescinds the forbidden rule to purchase its own shares by the JSC and becomes parallel to the international regulations. Consequently, by this new law, not only Turkish companies but also the international companies will have more investment opportunities as a result of the freedom of action.
1. Cevik O.N. “Anonim Sirketler”, Seckin, Ankara, 2000, s.676.
2. Yargitay T.D. 6/1/1964 gun ve E. 1963/2851, K.1964/93.
3. Doganay I. “Turk Ticaret Kanunu Serhi”, 1.inci Cilt, Beta, Istanbul, 2004, s.971.
4. Doganay I. “Turk Ticaret Kanunu Serhi”, 1.inci Cilt, Beta, İstanbul, 2004, s.971.
5. Cevik O.N. “Anonim Sirketler”, Seckin, Ankara, 2000, s.677.
6. Doganay I. “Türk Ticaret Kanunu Serhi”, 1.inci Cilt, Beta, Istanbul, 2004, s.969.
7. Yargitay 11. Hukuk Dairesi 30.9.2003 tarih ve 2003/2673 esas, 2003/8615.