INTRODUCTION
Since how profits are invested is critical to the development, growth, and financial stability of a company, one of the fundamental managerial issues for companies is how to utilize the profits gained. Companies can utilize the profits they have earned in various ways such as investment in new business areas, retaining the earnings in the company by setting aside reserves for challenging times or through capital increases, distribute dividends to shareholders, or repurchase their own shares. In this article, repurchasing of its own shares in publicly traded companies in Türkiye in scope of Capital Market Law no. 6362 ("CML") will be explained.
I. IN GENERAL
For publicly traded companies, the matter of share repurchases is regulated specifically under the CML differing from the rules for private equity companies which are regulated in Turkish Commercial Code No. 6102 ("TCC"). Article 22 of the CML states that publicly traded companies can repurchase their own shares within the framework of conditions determined by the Capital Market Board ("Board"). Moreover, the same article grants authority to the Board, in regulating the conditions, transaction limits, disposal or redemption of repurchased shares, and the procedures and principles regarding the disclosure of these matters concerning publicly traded companies' repurchase of their own shares. In this regard, the Board has enacted the Communiqué on Repurchased Shares ("Communique"). The repurchasing of shares in publicly traded companies will be evaluated in scope of CML, Communique, Board announcements and principle decisions.
II. AUTHORIZATION REQUIREMENT
Parallel to the TCC, the first paragraph of Article 5 of the Communiqué specifies that it is essential for the general assembly of a company ("GA") to authorize the board of directors ("BoD") for the company to engage in repurchases ("Authorization Requirement"). Accordingly, a repurchase program will be prepared by the BoD, and upon approval of this repurchase program by the GA, the authorization will be granted.
For publicly traded companies whose shares are listed on the stock exchange, an exception has been made to the authorization requirement. According to the fourth paragraph of Article 5 of the Communiqué, these companies can repurchase without the authorization requirement with a BoD decision to avoid imminent and serious loss. In this case, they must comply with the disclosure obligations in Article 12 of the Communiqué. Unlike TCC, the cases where the existence of imminent and serious loss is accepted are limited in the Communiqué. The presence of an imminent and serious loss is recognized in cases where the daily weighted average price of the Company's shares in the last month prior to the date of the relevant BoD resolution (i) is below its nominal value or (ii) had a depreciation of more than twenty percent.
Except for these cases, prior approval from the Board must be obtained by the company before repurchasing through a BoD decision.
III. LIMITATIONS ON REPURCHASED SHARES
The Communiqué imposes certain limitations in Article 9 to prevent potential adverse effects or misuse arising from share repurchases:
- Firstly, the nominal value of shares repurchased by companies under the Communiqué, including previous repurchases, cannot exceed 10% of the company's paid-up or registered capital. When calculating this ratio, the shares disposed of during the repurchase program will not be considered as a deduction in the calculation of this ratio (Article 9/1).
- Particularly for publicly traded companies, a limitation is also stipulated regarding the shares to be repurchased. The repurchased shares of these companies must be traded on the stock exchange. In other words, the company will conduct the repurchase from shares traded on the stock exchange. On the other hand, an exception to this limitation is also granted, and with the Board's approval, publicly traded companies can also apply the repurchase process by analogy with the provision in Article 6 of the Communiqué, which includes the rule for companies whose shares are not traded on the stock exchange (Article 9/2).
- Finally, the total value of the repurchased shares shall not exceed the total amount of resources that could be subject to profit distribution within the framework of the Board regulations. (Article 9/3).
IV. INSTANCES WHERE REPURCHASE AND SALE TRANSACTIONS CANNOT BE PERFORMED
To prevent the misuse of share repurchases in a manner that could lead to market manipulation or violation of the principle of capital preservation, Article 10 of the Communiqué specifies situations where repurchase and sale transactions cannot be performed.
In order to ensure fair market conditions for stock market investors, companies' internal information must also be fairly disclosed to the public. There are regulations in the capital market legislation regarding how the public will be informed and the information to be provided to investors. According to the first paragraph of Article 10 of the Communiqué, if there are deferred internal information that has not been disclosed by the company, no share repurchases, or sale transactions can be made within the scope of the Communiqué.
On the other hand, according to the second paragraph of the same article, companies that operate under the nominal capital system cannot conduct repurchase and sale transactions from the date of the GA decision if they have decided on a capital increase, and for companies operating under the registered capital system, repurchase and sale transactions cannot be conducted from the date of the BoD decision on a capital increase until the completion of the capital increase transactions. This provision is particularly aimed at preventing transactions that would be contrary to the principle of preserving the capital, especially those constituting the return of company capital.
VI. SHARE REPURCHASES WITHIN THE SCOPE OF THE BOARD'S ANNOUNCEMENTS
With the authorization in Article 22 of the CML, the Board can regulate the conditions, transaction limits, disposal or redemption of repurchased shares, and the procedures and principles for disclosure to the public regarding public joint-stock companies purchasing and pledging their own shares. In recent years, the negative events experienced across the country have adversely affected the capital markets and in this regard the Board has been guiding the practice through various announcements and principal decisions made to the public regarding share repurchases in order to protect investors.
The Board had previously removed some limitations after the attempted coup on July 15th Türkiye with Board's Press Release dated 21.07.2016 and Additional Statement dated 25.07.2016, and then announced that the application in such statements remain valid due to the negative effects of the COVID-19 pandemic on financial markets worldwide with Board's Press Release made within the scope of the Bulletin dated 23.03.2020. Finally, the Board has revoked these statements with Board's Principle Decision dated 14.02.2023, numbered 9/177.
In practice, publicly traded joint-stock companies announcing share repurchase programs are referring to the Communique and the Principal Decision dated 14.02.2023, numbered 9/177.
Board's Principle Decision dated 14.02.2023, numbered 9/177
Following the earthquake disaster in February 2023 in Türkiye, the capital markets entered another turbulent period. Therefore, the Board, with the aim of limiting the negative effects on the markets and protecting investors, enacted principle decision The said principal decision encompasses the following points:
Publicly traded companies can announce a share repurchase program without the need for a GA decision authorizing the BoD. However, this BoD decision must include, (to be presented to the company shareholders at the first GA meeting): (i) the purpose of the repurchase, (ii) the envisaged maximum duration of the repurchase program, (iii) the maximum number of shares to be acquired through repurchase program, and (iv) the maximum fund amount to be used. Additionally, the relevant BoD decision will be disclosed to the public in accordance with the regulations on special disclosures set by the Board.
Along with the principal decision of the Board, it has been stated that certain restrictions specified in the Communique will not be applied. These include; the limitations set forth in Article 9 of the Communiqué and section IV of this article regarding the value and specifications of the shares that could be subject to repurchase, public disclosure obligations except for paragraphs 5, 6 and 9 of Article 12 of the Communiqué, the transaction limitations set forth in subparagraphs (b), (c) and (d) of the first paragraph of Article 15 of the Communiqué and provisions regarding the disposal of shares regulated in Article 19, paragraphs 2, 6 and 9 of the Communiqué.
In general, it is observed that the Board aims to ensure that the stock market maintains its value during challenging periods such as natural disasters and epidemics, and to protect investors; and with the aforementioned principle decision, the Board aims to enable companies to implement their repurchase programs quickly by temporarily removing some limitations set out in the capital markets legislation in order to enable companies to keep their shares at their fair value.
CONCLUSION
The matter of companies repurchasing their own shares is generally regulated by the Turkish Commercial Code. For public companies, it is specifically addressed in the CML and the Communique, issued based on the authorization provided by the mentioned law and principal decisions of the Board.
Although Turkish law allows companies to acquire their own shares, it is noteworthy that the TCC and the Communiqué are subject to various limitations. It can be said that these limitations are intended to prevent the misuse of share repurchases in different ways.
On the other hand, especially due to the adverse events in the capital markets, the Board, in order to protect its investors, decided to remove some of the restrictions in the legislation for companies that will announce a share repurchase program until otherwise decided.
As a result, as of March 2024, the Board's resolution dated 14.02.2023 is in force and publicly traded companies can announce a share repurchase program by making a BoD decision by referring to the said resolution. There is no obstacle to the continuation of this practice until the Board repeals the principal decision through another regulatory action.
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.
