The Communiqué Regarding Material Transactions and Exit Right
Article 23 regarding the material transactions of companies and Article 24 regarding the exit right of shareholders, of the Capital Markets Law No: 6362 (“Law”), have been amended by the Law on Amending the Banking Law and Certain Legislation published in the Official Gazette on 25.02.2020. The Communiqué Regarding Material Transactions and Exit Right (II-23.3) (“Communiqué”) prepared by the Capital Markets Board (“Board”), in the scope of the secondary legislation works, has entered into force by being published in the Official Gazette on 27.06.2020. With this Communiqué, Common Principles Regarding Material Transactions and Exit Right (II-23.1) (“Repealed Communiqué”) published in the Official Gazette on 24.12.2013, has been abolished. The purpose of the Communiqué is the determination of the procedures and principles regarding the material transactions of companies, the materiality criteria, exercise and use of the exit right. Within the scope of this Newsletter, recently enforced regulations and the differences between such and the Repealed Communiqué have been examined.
- Material Transactions
The material transactions within the frame of Article 4 of the Communiqué are as follows:
- Being a party to mergers or demergers as defined in Article 5 of the Communique,
- The transfer of assets that satisfies the materiality criteria determined in Article 6 of the Communiqué or the execution of transactions leading to transfer of such assets or establishment of limited rights in favor of third parties on such assets on condition that such procedure shall not contradict Article 12 of the Corporate Management Communiqué (II-17.1) published in the Official Gazette on 03.01.2014 (No: 28871), and
- Introducing a new privilege or modifying the existing privileges of the shareholders
Transactions other than the above-mentioned and deemed as material transactions by the other regulations of the Board, are also subject to the provisions of the Communiqué. The principle activities of the company or the principal transactions regarding the structure of the company resulting in the change of the investment decisions of the investors by means of making essential changes in the natural business life may also be deemed as material transactions by the Board.
Mergers and Demergers Deemed as Material Transactions
In accordance with Article 5 of the Communiqué, material mergers are as follows:
- Company being a party to a merger in the form of a new establishment.
- In mergers in the form of acquisitions, the company being (i) the assignee party or (ii) the transferee party leading to a capital increase by 50% or more in consequence of the merger.
In accordance with Article 5 of the Communiqué, the material demergers are as follows:
- In whole demergers the company being (i) the demerging party or (ii) the transferee leading to a capital increase by 50% or more in exchange for the acquired assets.
- In partial divisions the company being (i) the demerging party and the acquired assets satisfying materiality criteria defined in Article 6, (ii) the transferee leading to a capital increase by 50% or more in exchange for the acquired assets.
Amendments Made with the Communiqué
Within the scope of the Repealed Communiqué, in the event that companies, which are within the scope of the Law, became parties to a merger or demerger transaction or resolved to be terminated, these transactions were deemed as material transactions, however by means of the Communiqué, the cases in which the transactions of mergers and demergers shall be deemed as material transactions has been determined explicitly, and the resolution of termination has not been included within the scope of Article 4.
At the same time the following cases are also explicitly stated as material transactions in the Repealed Communiqué, however they were not included in the Communiqué as material transactions.
- The company resolving to delist from the stock exchange list,
- Whole or material change of the subject of activity,
- To lease or acquire material amounts of assets from related parties of the company,
- In the planned paid capital increases, in case the fund to be obtained through the capital increase exceeds the existing capital of the partnership and is used for the whole or partial payment of debts regarding asset transfers excluding cash, to the related parties as defined in the relevant regulations of the Board and to the company.
- Materiality Criteria
A comprehensive amendment was made to the article regarding the materiality threshold and criteria of the Communiqué. In addition, materiality threshold provided as 50% in the Repealed Declaration have been increased with the Communiqué. In accordance with Article 6 titled as the Materiality Criteria of the Communiqué;
In accordance with Article 4/1 (c) of the Communiqué, the materiality criteria for the transactions of transfer of assets, or establishing transactions that result the transfer of such assets, or for the establishment of limited rights in favor of third parties on such property, as of the resolution date of the board of directors, is the circumstance of the below-mentioned ratios exceeding 75%:
- The ratio of the registered value of the relating asset to the total (active) asset in accordance with the last disclosed financial statements of the company, or
- The ratio of the transaction amount to the company value calculated by taking into account the arithmetic average of the daily corrected weighted average stock prices formed in the last six months, or
- In accordance with the last disclosed annual financial statements of the company, the ratio of the income obtained from the substantial relating assets to the sum of all income items that affect the net profit / loss for the period of activities in progress.
- The transactions executed by the subsidiaries are also considered in the calculation of the ratios stated above in terms of the companies that prepare the consolidated financial statements. Within this scope, the transactions that satisfy the materiality criteria for the consolidated financial statements of the parent company and performed by subsidiaries are deemed as material transactions for the parent company.
- According to another amendment introduced with the Communiqué; different calculation methods are provided for the sale of the shares of the subsidiaries consolidated in the financial statements of the company in a way that does or does not cause loss of control.
- As of the date of public announcement of the resolution of the board of directors regarding the material transaction in accordance with the Communiqué on Corporate Governance (II-17.1), in case a company with shares traded on the stock exchange in the First and Second Groups, is a real estate investment trust or venture capital investment trust with an actual circulating share ratio above 50%, the ratio of 75% stated in the first paragraph shall be applied as 50%. In addition, regardless of the ratio of the companies within the scope of this paragraph, the transactions listed in clause (c) of paragraph 1 of Article 4 causing complete change of the subject of the actual activity, are deemed as material transactions.
- It has been regulated that in case the transactions regarding the assets that constitute an economic integrity are carried out several times within a period of twelve months from the first transaction date, for the purpose of not exceeding thresholds determined in the Communiqué, the transactions shall be considered as a single transaction.
- In case the company has both consolidated financial statements and not consolidated financial statements, the consolidated financial statements shall be taken into account concerning the calculation of the above-mentioned ratios.
- Principles Regarding the Execution of Material Transactions
In order to execute material transactions, the companies shall firstly take a board of directors resolution, including the matters determined in Article 8 of the Communiqué; subsequently, the transaction shall be submitted to the approval of the general assembly and approved by the required quorums. It has been provided that there shall be a maximum of three months between the resolution of the board of directors regarding the transaction or if any the date of the consent /approval of the relevant institutions, and the date of the general assembly, where the transaction will be approved. In order for the resolutions regarding the material transactions to be resolved by the general assembly, in case higher quorums are not provided in the articles of association determining the ratio, without considering the meeting quorum, the Communiqué has stipulated that two thirds of the shares that have the right to vote in the general assembly meeting shall vote in favour, preserving the provisions of the Repealed Communiqué.
Another regulation protected by the Communiqué is the deprivation of votes in case the transaction has a personal result. Accordingly; the real persons with the status of ultimate controlling shareholder being a party to a material transaction according to Article 436 of the Turkish Commercial Code (“TCC”) or companies in which such real persons have the management control, in case such transaction has direct personal consequences for real persons, they shall not be able to vote in the general assembly meetings in which such material transaction will be approved. It has been accepted that mergers, demergers and alteration of type do not have personal results. In addition, while an agenda item regarding the withdrawal from the transaction, including the conditions related to the withdrawal from the transaction, is to be voted, it has been regulated that all the shareholders and agents participating in the meeting may vote without complying with these principles.
In the event that the pre-transaction situation is not provided within thirty days as of the notification date of the Board resolution regarding the removal of the transactions executed without complying with the principles of the Communiqué, the authority is authorized to implement administrative fines and to file a lawsuit for the cancellation of such transactions in accordance with the provisions of TCC regarding the annulment of the general assembly resolutions.
- Exit Right and Its Exercise Process
Principles Regarding the Exit Right
The principles regarding the exit right are regulated in Article 11 of the Communiqué. It is regulated that the shareholders, who attended the General Assembly meeting and voted negatively on the agenda item regarding the material transaction and recorded this opposition to the minutes of the meeting, have the exit right by selling their shares to the company. The condition of recording in the minutes by being opposed is not required if the shareholder or her/his representative was unjustly not allowed to attend or vote in the general assembly meeting regarding the material transactions and if the call is not made in accordance with the procedure or the agenda is not properly announced.
- Owners of the right of usufruct cannot exercise the exit right directly.
- The company pays for the exit right constitutively, but in the event that certain individuals or persons benefit directly from the material transaction such as the incurrence of dividend privilege, the exit right is paid by this person or persons instead of the company.
- According to Article 12 of the Communiqué, it is obligatory that the exit right, which will start within six working days at the latest as of general assembly date and be used within ten working days at the latest, must be used through an intermediary firm. However, an exemption to use the exit right through an intermediary firm may be granted by the Board upon request of the companies whose shares are not traded in the stock exchange.
- It is stipulated that the shareholders who apply to exercise their exit right will be paid by the companies the day after the sale at the latest.
- Shareholders who want to exercise their exit right must use this right for all of their shares that carry this right and are listed in the stock exchange.
Proposal of Shares Possessing Exit Right to Other Shareholders or Investors
The amendment made in Article 24 of the Law made it possible for the shares possessing the exit right to be proposed to existing shareholders or other investors before they are purchased by the company and distributed on a proportional distribution basis unless otherwise agreed. The process regarding this issue has been regulated in the Communiqué.
Accordingly, in the companies whose shares are traded on the stock exchange, a board of directors resolution may be taken regarding the proposal to other shareholders or investors over the exercise price of the right to exit before the purchase of the shares possessing the exit right by the company.
It is regulated that shareholders or investors who wish to purchase shares possessing the exit right can purchase these shares as follows:
- Shareholders or investors who wish to purchase the shares possessing the exit right will submit their written requests regarding the amount of shares they wish to receive within three business days as of the general assembly date to the intermediary firm determined by the company.
- The amount related to the shares to be purchased will be blocked before the intermediary firm.
- The intermediary firm notifies these requests to the company at the end of the third business day, and the company announces the incoming requests and purchase amounts at the Public Disclosure Platform (PDP).
If the company does not receive a request regarding the shares possessing the exit right, the company shall take a resolution regarding the starting and ending date of the purchase and announce this resolution on the same day at the PDP.
The Exercise Price of Exit Right
Regulations regarding the determination and calculation of the exercise price of the exit right are included in Article 14 of the Communiqué, and the full and cash payment of the right to exit has been made compulsory.
The Price of the Exit Right in Companies whose Shares are Traded in the Stock Exchange
The price of the exit right in partnerships whose shares are traded on the stock exchange is as follows:
- For companies whose shares are traded on the Top Stock Exchange (Yıldız Pazar), it is the arithmetic average of the daily adjusted weighted average prices formed in the stock exchange within the last month before the public announcement of the board of directors resolution regarding the material transaction or the announcement date if a public disclosure was made by the authorized persons of the company before the board of directors resolution date.
- For other companies, it is the arithmetic average of the daily adjusted weighted average prices formed in the stock exchange within the last six months before the date announced above.
The Price of the Exit Right in Companies whose Shares are not Traded in the Stock Exchange
The exercise price of the exit right in companies whose shares are not traded in the stock exchange is calculated as follows:
- A valuation report is prepared based on the value at the date when the resolution of the board of directors regarding the material transaction was announced to the public.
- The whole or summary section of the valuation report is disclosed together with the agenda of the general assembly meeting where the material transaction will be discussed.
- In the event of a significant change that will affect the value of the company between the date of the valuation report and the date when the material transaction will be discussed at the general meeting; an additional report showing the effect of the said change on the price of the exit right is prepared by the appraiser and submitted to the general assembly. If it is concluded in the additional report that the price of the exit right is affected, the exit right is exercised at the newly determined price.
- Cases In Which Exit Right Does Not Arise and Exemptions
Cases in which exit right does not arise
In cases in which the exit right does not arise, except for other relevant regulations, the resolution of the board of directors is sufficient, and a general assembly decision is not required.
Some cases where the exit right does not arise, such as compulsory transactions made in accordance with the legislation, mergers and demergers in the facilitated procedure, liquidation transactions of the companies under liquidation, transfer of assets made to subsidiaries owned by at least 90% of the capital, are detailed in Article 15 of the Communiqué.
Exemptions from the Obligation to Exercise the Exit Right
With another amendment made in Article 24 of the Law, the authority to grant exemption from the obligation to exercise the exit right has also been granted to the Board. In the Communiqué, within the scope of this authority, in cases where the transactions are carried out by the companies in order to avoid financial difficulties, material benefits are obtained in exchange of restricted rights facility on the assets in favor of third parties or transactions such as being a party to intra-group mergers where the core business and the shareholder structure are largely protected by the transferee company are listed as exemptions that can granted by the Board. In addition, some cases such as the removal / modification of privileges, the voluntary share purchase proposal, and the merger transactions to which the company is a party are listed as cases where the exit right is not born in the abrogated Communiqué are included within the scope of exemptions.
For exemption requests, it is necessary to apply to the Board within ten working days following the resolution date of the board of directors. If it is concluded that the exemption conditions are met as a result of the examinations and the evaluation of the information and documents that are requested made by the Board, an exemption may be granted from the obligation to exercise the exit right.
In Article 16 of the Communiqué, exemptions from the obligations to exercise the exit right are regulated as follows:
- To be deemed appropriate by the Board to propose voluntary purchase of shares specific to the material transactions.
- Operations of abolition of privileges free of charge and constriction of privileges in terms of subject or scope.
- Material transactions carried out by the company in order to avoid financial difficulties, including the failure to pay the debts due, failure to cover the receivables with the cash and the equivalents or the temporary cessation of its activities.
- Acquisition of material benefits by the Company in exchange of establishment of restricted right which is regulated under subparagraph (c) of the first sentence of Article 4.
- Merger transactions as defined in the Merger and Division Communiqué (II-23.2), in which the merger company is a party.
- Company’s transactions undertaken within the scope of subparagraph (c) of the first sentence of Article 4 with its subsidiaries where the company has less than 90% of its capital.
- Material transactions performed by companies where management control is provided with a public agency, or public institutions that do not have management control but are privileged shareholders.
- The intra-group merger transactions in which the main operating subjects and financial structure of the transferred company are protected without a substantial change in the transferee company, and the shareholders of the transferred company have at least 2/3 of the shareholder’s capital acquired after the transaction, having the management control by the same real and / or legal person.
With the Communiqué, amendments have been made in the material transactions of the companies within the scope of the Law, and additionally the materiality criteria stipulated in the Repealed Communiqué have been raised and some transactions that were listed as material transactions have been removed. At the same time, with the Communiqué, a number of additional regulations regarding the exercise of the exit right have been introduced, the cases in which the exit right is not born has been changed and exemptions from the obligation to exercise the exit right have also been regulated.