Article on Financial Assistance Prohibition
Financial assistance prohibition is regulated under article 380 of the Turkish Commercial Code numbered 6102 (“TCC“). Pursuant to Article 380 of the TCC, it is stated that the legal transactions executed by a company with another third person for the purpose of acquiring its shares such as provision of (i) advance payment, (ii) loan or (iii) pledge, are considered to be invalid. The financial assistance ban stated under article 380 of the TCC regulates prohibition of leveraged buyout transactions. Leveraged buyout is a financing method for some acquisitions, and in this method, the financing to be used is secured with the assets of the target company. The aim of these acquisitions is to secure the whole or a significant part of the sales price of the shares of the target company with the assets of the target company. However, the financial assistance prohibition regulated under article 380 of the TCC prevents this method.
Purpose and Scope of the Financial Assistance Prohibition
Prohibition of financial assistance emerges in order to prevent the circumvention of the relevant TCC provisions in which the acquisition and pledge of joint stock companies’ own shares are subject to certain conditions and in order to get rid of abusing these exceptional regulations. In the article justification of this article, it is set forth that “The first paragraph aims to prevent the ineffectiveness and entanglement of Article 379 by way of considering invalid the following: financing, lending or putting collateral or, assisting in any way, in order for a joint stock company to purchase its shares by someone else, namely a third party. The provision accepts this kind of support as indirectly purchasing its own shares (share certificates). For this reason, the name of this article is specified as “evasion of law”. In addition, thanks to these provisions, it is prevented from using the target company’s assets in merger and acquisition transactions.
The scope of financial assistance can occur in two ways: (i) providing financing for the transfer of the share and (ii) providing financing for the payment of the price of the share. Accordingly, all kinds of these agreements, the subject of which are advances, guarantees, or borrowed ones, are considered as “prohibited transactions”. It will not be checked whether there is a loss against the target company as a result of the said transaction, the transaction is directly prohibited.
Legal and financial examination or consultancy expenses for the transfer of shares, showing the real estate of the company as collateral for the buyer’s loan, placing a pledge on its movable properties, and making the transfer by such means can be exemplified as financial assistance. Therefore, the guarantees provided by the target company can be in cash, in kind or in person.
It is controversial whether the “invalidity” will be considered only in the context of financial assistance or the invalidation of the share transfer made through financial assistance should be considered as invalid. Yet, it can be said that the matter is left to the case law and doctrine as concluded from the justification of the article. However, it can also be said that the provision of the relevant article 380 of the TCC regulates only financial assistance to be false in literal interpretation. In addition, pursuant to the following article 385, it is stipulated that the shares acquired in violation of Articles 379 and 381 (acquisition of its own shares) should be disposed within six months as of the acquirement of the same. On the grounds that the financial assistance prohibition is also based on the same legal basis and the protection of the target company’s assets is aimed; it can be asserted that, in fact, only financial assistance is invalid and the share transfer made due to financial aid is valid.
Exceptions of Financial Assistance Prohibition
The first exception concerns “financial assistance” transactions, which fall within the business issues of credit and financial institutions. This exception is mostly for banks, and in practice, it is relate to the credit support provided by banks to third parties to take over their (bank) shares. The assistance provided by banks under this method shall not be considered as invalid.
The second exception has been introduced in order to pave the way for the acquisition of shares by the company’s own or affiliated companies’ employees. In this context, advances, loans or guarantees to be given to company employees for their share acquisition shall not be considered as invalid.
The limitation which is applicable for these exceptions is as follows: if the financial assistance transaction (i) reduces the amount of reserved funds that must be set aside in accordance with the company’s articles of association and as per law, or (ii) interferes with the provisions regarding the expenditure of these reserved funds, the said exception provisions shall not be applied and even these transactions shall be considered as invalid.