Majority shareholders in Turkish companies have been, and will be until 1 July 2012, unable to force minority shareholders to sell their stakes, due to the absence of squeeze-out rights under the current Commercial Code. The new Turkish Commercial Code No.6102 (the “New TCC”), which will take effect on 1 July 2012, will change this by introducing, to the Turkish corporate scene, squeeze-out provisions mainly inspired by the Takeovers Directive of the EU.
As stated above, the current Commercial Code, which is in force since 1 January 1957, did not provide for squeeze-out provisions. Even though the change of control or the acquisition of stakes in listed companies in excess of certain thresholds as set forth under the Capital Market Board regulations triggers the launch of mandatory tender offers, and there exists also a voluntary tender offer concept, the minority cannot be forced to sell their shares to the majority shareholders. The foregoing meant that the acquirer of the majority of the shares would have to live with the minority shareholders, which may interfere, albeit to a limited extent, with the operation of the company.
The squeeze-out of the minority shareholders may occur under the New TCC in two contexts: (i) squeeze-out mergers (Article 141/2 of the New TCC) and (ii) buyout rights of the absolute majority (Article 208 of the New TCC).
Turkey: Opening the door
Before elaborating on the above mentioned squeeze out provisions, it is worthwhile to mention here that, unlike the squeeze-out rights, the New TCC does not bring about sell-out rights, which provide the minority shareholders with a reciprocal right to compel the majority shareholder to buy their shares if and when the majority's stake reaches a statutory threshold. The sell-out rights are governed by similar principles governing the squeeze out provisions which are set forth under the inspiring sources of the New TCC.
Under the new rules companies engaging in a merger process may under the merger agreement either give their shareholder(s) the right to choose a stake and associated shareholder rights in the company surviving the merger, or a cash amount (“ayrilma akcesi”) corresponding to the real value of the stake that they would be entitled to in the surviving entity.
Alternatively they may solely offer certain shareholder(s) a cash amount for their shares, and by doing so, deprive them of their rights to become a shareholder in the entity surviving the merger. The option provided under this option must be approved by a decision quorum of 90 percent at the general assembly of shareholders (“GAS”) of the entity which will be absorbed at the closing of the merger process. As long as this 90 percent decision quorum is met, the shareholders compelled to accept cash for their shares cannot oppose such GAS resolution, except for the amount of the cash offered.
This new cash-merger concept is said to aim at ensuring harmony at the company concerned, by providing for removal mechanism against the shareholders who are not acting in concert with the majority of the shareholders for the interest of the company in question.
Buyout rights of the absolute majority
The New TCC does not provide a direct option to purchase the shares of the minority in case of absolute majority. In fact, the main difference between Article 208 of the New TCC and European Union Directive on Takeover Bids 2004/25/EC, which inspired squeeze out regime of the TCC, is that, the New TCC recognizes the buyout rights of the absolute majority (ie those having a stake of at least 90 percent) only if the minority shareholders abuse its statutory minority rights.
According to Article 208 of the TCC, shareholder(s) having a direct or indirect stake of at least 90 percent in a company (i.e. a parent company) may resort to court for the acquisition of the stake(s) of the minority shareholder(s) on the stock exchange value (if such value does not exist, real value should be paid as per Article 202), if such minority (i) disrupts the operation of the company; (ii) acts against the principle of good faith; (iii) causes disturbance in the company or (iv) acts heedlessly.
In order to exercise this buy out right, the majority shareholder requires not less than 90 percent of the share capital and at least 90 percent of the voting rights in company to acquire targeted minority shares. Once these conditions are met, the majority shareholder may acquire the shares of the minority at their stock exchange value (real market value) or failing that, at a value to be determined according to Article 202 of the TCC. It should be noted that, in order to avoid any abuse, it will rest to the competent court do decide whether the conditions are satisfied or not to exercise of this buy out right and the buy out price for the minority shares.
The new squeeze-out provisions are expected to contribute to the growth of the M&A activities and give rise to the entry to the market of more private equity firms, who have had, to date, a relatively small market share in Turkey. Nonetheless, it is apparent that the new squeeze-out concept outlined above requires secondary regulations under which functional mechanisms should be put in place to monitor the fulfillment of the conditions applying to the squeeze-out rights, as well as the determination of the cash consideration to be paid to the minority. Moreover, established settled case-law is yet to be made on these new provisions, following the entry into force of the New TCC, so we will not be able to understand how the Turkish courts will approach new squeeze-out provisions.
On the other hand, whether the squeeze-out provisions will be found against the Turkish Constitution, Article 35 of which expressly specifies that everyone is entitled to the right to property, is presently unknown. According to the said provision of the Turkish Constitution, the right to property can only be restricted by law, for the sole purpose of the public interest. Thus, even though the first test required under the Constitution, i.e., the statutory restriction, is met under the New TCC, it is yet to be seen, and will be unknown until the squeeze out provisions are challenged before the Constitutional Court, whether compelling the minority shareholders to sell their shares, i.e., infringing their property rights, serves the public interest.
Haluk Bilgic is a partner at Ozdirekcan Bilgic Dundar, correspondent firm of Gide Loyrette Nouel in Turkey.