I. INTRODUCTION
The turkish commercial code numbered 6102 (“TCC”) published in the Official Gazette dated February 14, 2011 and numbered 27846, introduced the concept “group of companies”, comprising a controlling company and affiliate companies at least one of whose registered office is located in Turkey. Through introduction of group companies in TCC, the new regulation on acquisition of minority shares is brought to Turkish companies law. “Squeeze-out”, as is named in the Anglo-Saxon literature, means removal of minority shareholders from joint stock companies. Two different methods are set forth in TCC namely: stipulating a payment to be made in return for parting from company during merger under Article 141 and buy-out right granted to the controlling company under Article 208 of the TCC.
In order for a company to be deemed a controlling company, it shall meet at least one of the three criteria: (i) the company holds majority of voting rights in affiliate company, (ii) the company holds the right the elect the majority of members of board of directors sufficient to take resolution pursuant to articles of association, and (iii) the company holds the majority of voting rights individually or jointly with other shareholders, based on an agreement.
In principle, shareholders representing one tenth of the principal capital in non-public companies and one twentieth in public companies constitute the “minority” within the context of TCC. While shareholding rights are defined as rights which may be used by each shareholder, minority rights are granted only to person(s) holding a certain ratio of capital. A new method for elimination of minority shareholders from the companies situated within the group of companies.
Buy-out right which eases companies’ adaptation to commercial affairs that are based on competition is basically regulated through taking European Union legislations into consideration and accordingly, use of said rights is subject to presence of certain conditions. The legal characteristics of buy-out right, the reason for issuance of such right and conditions for its implementation will be explained in this article following the general information on such right which is unique for group of companies and finally, a legal assessment on this new provision will be made.
II. SQUEEZE-OUT
The term “squeeze-out” used widely especially in the western countries means the right to eliminate the minority shareholders by means of buying their shares. This concept has been added to the Turkish legislations through taking European Union’s directive dated 2004 on buying control shares of companies and Forum European High Level Experts Report. TCC envisages two methods for majority shareholders’ use of the said right: namely, payment to be made in return for parting from company envisaged under article 144/II of the TCC and buy-out right envisaged under article 208 of the TCC.
III. PAYMENT IN RETURN FOR PARTING FROM COMPANY
As per Article 141 of TCC, companies involved in merger may decide on elimination of the majority from company through paying them in return for parting from the company. As per fifth paragraph of article 151 of the TCC, if the merger agreement sets forth such payment, it shall be approved with the affirmative votes of ninety percent of the existing voting rights. Shareholders specified in name in the merger agreement may not object to a decision taken with such majority.
IV. BUY-OUT RIGHT
The method which the controlling company holding at least ninety percent of voting rights and shares appeal to in order for elimination of minority shareholders who hinder company’s functions through abusing their minority rights is phrased as “buy-out right” in TCC. Through use of buy-out right, the company secures full control on an affiliate company by means of buying the shares of minority shareholders.
Legal Characteristics of Buy-Out Right
Buy-out right is a dissolving constructional right and may be used unilaterally via the judicial court. Through use of this right by the controlling company, minority shareholders transfer their shares to controlling shareholders and be deprived from all of their shareholding rights. The controlling company does not have to appeal to buying out method following the satisfaction of the relevant conditions. Likewise, neither may the minority shareholders force the controlling shareholder to use this right. However, should the relevant conditions are met; they may request implementation of their parting rights or termination of company on valid ground.
Buy-out right is possible only if the conditions envisaged under TCC emerge. The legislators have not envisaged any other method for use of buy-out rights in addition to the conditions listed in Article 208 of TCC. Moreover, provisions which restrict, inconvenience, ease or abolish use of this right may not be included in the articles of association.
Legislator’s Purpose in Including Buy-Out Right in TCC
There are several reasons for including buy-out right in TCC. Firstly, the company’s maintenance of its economic existence is aimed for. In other words, prevention of emergence of conflicts of interest between the minority shareholders and the controlling company from causing difficulty in taking healthy decisions through impairing functions of the company is aimed for. In practice, minority shareholders are observed to abuse their minority rights in some cases. The minority’s filing action for annulment of every general assembly resolution, their blocking taking of resolutions requiring unanimous vote may be listed as examples to such abuse. In these cases, the company’s functioning is evidently being impaired. Through TCC’s entrance into force, such threat is intended to be set aside by means of granting buy-out right to the majority shareholders.
Through use of buy-out right, the minority parts with the company in which they do not have any say after they are paid the sums corresponding to the values of their shares due to their conduct against the favor of the company. The respect which shall also be noted at this point is that the presence of conduct of minority shareholders in breach of good faith principle is required in order to buy out their shares.
In publicly held joint stock companies, in addition to the purposes stated above, buy-out right may also serve the purpose of converting the company to a non-public company which is referred to as “going private”. Publicly held joint stock companies may also eliminate the minority shareholders provided that the requirements seeked under the Capital Market Law numbered 6362 (“CML”) published in the Official Gazette dated December 30, 2012 and numbered 28513 are met. Accordingly, publicly held joint stock companies shall be exempt from additional obligations and expenses and the majority shareholders of the company shall be able to manage the company without opposition of minority shareholders.
Requisites for Implementation of Buy-Out Rights
First requisite for the use of buy-out right is the existence of a controlling company and an affiliate company. The condition that the said controlling company holds, directly or indirectly, at least ninety percent of the shares and voting rights of the affiliate company is being seeked. The law lacks provisions as to what time shall be taken into consideration in calculation of this ratio. The law also lacks provisions as to the duration which such ratio shall be conserved. Nonetheless, the leading opinion is that such ratio is required to be secured and be conserved at the moment which the controlling shareholder files request to the court for use of its buy-out right and at the moment which the court delivers judgment on such. In calculation of the ratio, percentage of shares and/or voting right shall be taken as basis; therefore, shares without voting right shall not be taken into consideration. Additionally, the calculation shall be made in consideration of shares having privilege related to voting. These shares might have been acquired by means of various methods; public offer for share purchases, individual share purchases, collection of shares from the market, voting agreements, coming to terms with the target company, for instance. The legislator, on the other hand, has eased implementation of such method by not setting forth any conditions in this respect. Buy-out is a right which may be used by means of judicial courts. The competent court shall be the Civil Court of First Instance in the place where the registered office of the company is situated. The fact that the decision on elimination from company may only be rendered by the court is meant to prevent the controlling company’s abuse of such right. The said method also constitutes an assurance for complete payment of the values of shares to minority shareholders.
The second requisite is that the minority shareholders conduct activities such as to impair the functioning of company in breach of good faith principle. In Article 208 of TCC, this circumstance is phrased as “prevents functioning of company, acts in breach of good faith principle, causes evident problems or acts carelessly”. In addition to shareholding rights, rights which the minority shareholders may use against the company are also present. Since no right is allowed to be abused, the same principle shall be applicable to the rights granted to minority shareholders in companies law. Article 531 of TCC includes the first right which is granted to the minority shareholderby law, namely to request termination of the company on valid ground. Despite the fact that the judge is entitled to rule elimination of minority shareholder from company or another remedy in the face of such request, the company’s being constantly under a threat of termination is a respect which may influence the development of company negatively. Constantly filing action for termination through abusing such right is likely to impair the peace within the company. The minority may use their rights as a threat against the company and controlling shareholders through emphasizing their personal interests instead of the interests of the company. Additionally, the company will be unable to take and implement decisions as to respects requiring unanimous vote. The circumstances of preventing functioning, acting carelessly and in breach of good faith principle listed in the relevant article shall be detected by the competent court. The scope of these circumstances will be crystallized within the implementation process of the new TCC.
The last requisite is to buy the shares of minority shareholders on their exchange or actual balance sheet values. This requisite is phrased in the relevant article as follows: “The controlling company may buy the shares of minority shareholders on their exchange values, if any, and if no such value exists, on the value assessed through the method envisaged in the second paragraph of Article 202.” In order for minority shareholders to be eliminated from the company by the controlling shareholders, payment of the actual values of the shares of minority shareholders is required. In consideration of the applicable legislations other than TCC, buying the shares of minority shareholders on their actual balance sheet value is not meant to be a sanction but instead, it aims for supporting the group of companies. As per the second paragraph of Article 202 of TCC, they may request from the court that their shares are bought on at least their exchange values, if any, and if no such value exists or such value is not equitable, on their actual values or a value to be assessed in accordance with a generally accepted method.
Values of shares may be determined neither by the controlling shareholders nor minority shareholders. In assessment of the value, taking the data existing on the date closest to the date of court decision will be equitable.
In the payment made in return for parting, merger of two companies is in question whereas in the buy-out right, presence of a controlling company and an affiliate company is required. The controlling company must hold at least 90% of shares and voting rights of the affiliate company. In the event that a payment to be made in return for parting is stipulated, the decision quorum for merger is 90% which is equal to the ratio required for use of buyout right. In this respect, the said two provisions are in compliance. The fact that a high quorum such as ninety percent is seeked serves the purpose of protection of the minority. The duration for which such ratio persists does not bear any significance. The legislators have not envisaged any conditions as to duration in order for easing use of buy-out right. The request to buy-out shall be implemented by means of judicial courts. The minority has the right to object to the assessed value based upon the argument that the required conditions have not been constituted. Whereas in case of stipulating payment to be made in return for parting from company, the shareholders who are eliminated from company only have the right to object to the assessed value.
The respect which under what circumstances the rights granted to the minority shareholders shall be deemed to be in breach of good faith principle is the most controversial point in this respect as the relationship between the interests of joint stock company and use of minority rights shall be evaluated diligently. In the event that the court requires strict conditions, use of the right to eliminate from the company set forth in Article 208 of TCC will become substantially difficult. Use of this right by the court constitutes an assurance for the minority shareholders’ taking possession of the sums to be paid as value of their shares.
In conclusion, buy-out right is a mechanism brought against the minority’s right to request termination of company on valid ground. The respect whether this has the characteristic of defense or sanction is controversial. The legislators have envisaged various conditions in order not to aggrieve any of the parties. The ultimate objective is to secure the peace within the company and to act in consideration of the interests of both parties. While the buyout right is being used against the minority shareholders, the minority has the possibility to defend itself through requesting termination of company on valid ground. Thereby, both the controlling shareholders and the minority shareholders are enabled to act in compliance with good faith principle.
