Recent Developments
We shared the draft Communiqué on Material Transactions and Exit Right No. II – 23.3 which the Capital Markets Board of Turkey (“CMB“) made available for public in our Client Alert dated March 30, 2020.
The draft communiqué prepared by the CMB was revised in accordance with the amendments to the Capital Markets Law No. 6362 (“CML“) and the market actors’ revision demands. The new Communiqué on Material Transactions and Exit Right No. II – 23.3 (“Material Transactions Communiqué“) entered into force upon its publication in the Official Gazette No. 31168 dated June 27, 2020.
In addition, the CMB prepared a set of guidelines to explain the new updates and clarify the potential issues on the implementation of the new Material Transaction Communiqué.
What’s New?
Material Transactions
The new Material Transactions Communiqué excludes certain transactions triggering exit rights regulated under the former communiqué, and thus narrows the scope of transactions granting the exit right.
The new Material Transactions Communiqué removes certain transactions triggering the exit right under the former communiqué, such as the dissolution of public companies; the complete or material alteration of the field of activity; and the de-listing from the exchange.
The CMB is able to classify transactions as material transactions that are not classified as material transactions under the new Material Transactions Communiqué, if these transaction(s) alter the business objective or ordinary course of business of the public companies and affect investors’ investment decisions.
Under the Material Transactions Communiqué, the following transactions of public companies will be deemed material transactions:
- Certain mergers and spin-offs defined under the Material Transactions Communiqué.
- Transferring assets or facilitating disposition transactions that have the consequences as the transfer of the assets, or establishment of limited rights in rem in favor of a third person on, the public companies’ assets, provided that they satisfy the materiality criteria (the ratio of the transaction value to the public company’s value must exceed 75% of the total public company’s value with respect to the calculation method set out in the new Material Transactions Communiqué).
- Changing the company type of public companies.
- Introducing a new privilege or modifying the existing privileges of the shareholders.
Not every merger and spin-off will be considered a material transaction. Only the following mergers and spin offs will qualify as material transactions:
- When a public company is a party to a merger in which two or more companies consolidate into a newly-established company.
- When a public company is a party to a merger in which the public company will merge into the surviving entity, or when a public company is the surviving entity, in which its share capital increases by 50% or more as a result of a merger.
- When a public company is a party to a spin-off in which the public company is fully divided into two or more companies, or when a public company takes over the assets and increases its share capital by 50% or more in return for the assets transfer as result of a full spin-off.
- When a public company is a party to a partial spin-off in which the public company transfers an amount of its assets satisfying the materiality criteria, or when a public company takes over the assets and increases its share capital by 50% or more in return for the asset transfer as result of a partial spin-off.
Pursuant to the new Material Transactions Communiqué, all asset related transaction(s) of public companies listed as tier 3 under the Corporate Governance Communiqué No. II-17.1 and whose free floating ratio of shares representing the share capital is more than 50% will be classified as material transactions if these transaction(s) will cause a change in the business objective of the public company activity, regardless of the materiality criteria set out in the communiqué.
Principles of Application of Material Transactions
Public companies must pass a board of directors’ resolution which will be subject to the approval of the general assembly to execute material transactions.
There must be no more than three months between the board of directors’ resolution and the general assembly’s decision regarding the important transaction. However, if the transaction requires any regulatory approval, the three-month period will start when the approval is granted.
The CMB is entitled to take a decision to reinstate the transaction if the transaction is not duly performed. If this decision is not fulfilled within 30 days, the CMB may impose an administrative fine and file a lawsuit for the cancellation of the unlawful transaction.
Determination of Shareholder(s) Possessing Exit Rights and Amount of Shares
The new Material Transactions Communiqué grants exit rights to shareholders holding shares as of the public disclosure date of the material transaction. This prevents investors from benefitting from the exit right by acquiring shares after the public disclosure. In addition, in case any shareholder sells any shares after the public disclosure of the material transaction, these shares will not be subject to the exit right even if the shareholder buys them back.
The Central Registry Agency will send a list containing information about the shareholders possessing the exit right to the public company before the business day when the general assembly meeting is held.
The Exit Price of Shares
The exit price of the public companies’ shares listed on the exchange will be calculated based on fair value. Therefore, under the Material Transactions Communiqué, there are two separate calculation methods for the exit price.
Under the Material Transactions Communiqué, the exit price of shares will be:
- The arithmetic average of the daily adjusted weighted average trading prices for the last one month prior to the disclosure date for public companies listed on Borsa İstanbul A.Ş.’s Star Market.
- The arithmetic average of the daily adjusted weighted average trading prices for the last six months prior to the disclosure date the transaction for other public companies.
The exit price in respect of public companies that are not listed on the exchange will be calculated pursuant to the valuation report based on the public company’s value at the public disclosure of the transaction. However, if there is an event causing an increase or decrease in the value of the public company from the disclosure of the valuation report, additional valuation reports must be prepared.
Offering Exiting Shareholders’ Shares to Other Shareholders and/or Investors
The new Material Transactions Communiqué introduces an option to grant the board of directors a right to offer these shares to other shareholders and/or investors with a board of directors’ resolution before the shares are acquired by the public company.
In this case, the exiting shareholders’ shares will be distributed on a pro rata basis to all other shareholders and/or investors requesting these shares.
In the event that there are private agreements in place between these other shareholders and/or investors, the exiting shareholders’ shares will be distributed in accordance therewith.
Transactions That Do Not Trigger Exit Rights and Exemptions
In addition to the existing exemptions, the new Material Transactions Communiqué classifies rescue mergers; sale of public company’s assets with the buy-back right; and sales of an affiliate’s shares through public offering as transactions that do not trigger the exit right.
The CMB is also entitled to grant an exemption to companies for certain transactions, such as relief from financial stress and other actions that fall outside of the scope of the exemptions pursuant to the current Material Transactions Communiqué.
Under the former communiqué, certain transactions were exempt from the exit right (such as abolishing/changing privileges; offering voluntary tender offers; mergers in which special purpose acquisition companies are party to the transaction) whereas the CMB is now authorized to decide whether or not to grant an exemption for these transactions.
Public companies requesting an exemption from the CMB to recover from their financial difficulty must prove that the public company is in the state of financial difficulty and that the planned material transaction will have a positive effect on their financial situation. In addition, the CMB requires public companies to submit independent assurance reports prepared by institutions authorized to conduct independent audits and prepared in accordance with the principles set out in the CMB’s regulations.
Provisions that apply to Publicly Disclosed Material Transactions
The new Material Transactions Communiqué sets forth transition provisions for material transactions disclosed before the new Material Transactions Communiqué entered into force.
Pursuant to the new Material Transactions Communiqué, the provisions of the former Material Transactions and Exit Right Communiqué published in the Official Gazette dated December 24, 2013 and numbered 28861 in line with the new amendments to the CML dated February 25, 2020, are applicable to material transactions to be publicly disclosed before the new Material Transactions Communiqué entered into force.
For material transactions of public companies listed on the exchange that were disclosed before the new Material Transactions Communiqué entered into force, shareholders possessing exit rights and amount of shares that is subject to the exit right will be determined based on the following dates:
- For material transactions publicly disclosed before February 25, 2020, shareholders possessing exit rights and amount of shares that is subject to the exit right will be determined based on February 25, 2020.
- Between February 25, 2020 and June 27, 2020 and the entry into force of the new Material Transactions Communiqué, shareholders possessing exit rights and amount of shares that is subject to the exit right will be determined according to the date on which the transaction was disclosed.
Conclusion
With the entry into force of the Material Transactions Communiqué, a new era begins for both public companies and investors whereby both parties’ interests are protected in a more balanced manner.
