The Article 380.1 of the Turkish Commercial Code (TCC), which entered into force in 1.7.2012. Article 380.1 of the TCC prohibits transactions concerning the grant of advance, loans or security by the target company for the purpose of acquiring the target company's shares by a third party. Accordingly, financial assistance provided by breaching this rule shall be null and void although there are certain exceptions. This article's preamble states that it is based on the Second Council Directive of the European Union (EU) (77/91/EEC). Indeed, in its primitive form when adopted in 1976, the Directive prohibited financial assistance for some reasons, however, the implementation of the financial assistance prohibition led some discussions and eventually EU commision amended the provision of the Directive in 2006.
This issue is currently the focus of intense debate at the Turkish Commercial Law level and it was important to understand the scope of such a provision. Also, comparative approach was used to develop insight relevant to rational underlying of the abolishment of this prohibition at the EU level. To do so, I took opportunity to evaluate whether an amendment of TCC Article 380.1 was required to be aligned with the European Union's current approach.
The first regulation on the prohibition of financial assistance is in Turkish Commercial Code No. 6012. Turkish Commercial Code 380.1 provides that, "Legal transactions on advancing funds, making loans or providing security effectuated by a company with a third party for the purpose of acquisition of shares shall be null. The provision of nullity herein shall not apply for transactions that are in scope of the business matters of credit and financing institutions or legal transactions on advancing funds, making loans or providing security to employees of a company or subsidiaries thereof for acquisition of company shares. However, these exceptional transactions shall be null where these reduce the mandatory reserves under the law and its articles of incorporation, breach the rules on expending the reserves under Article 519 or do not allow for allocating the reserve provided for under Article 520." Even though the resource of the regulation is specified as "Second Directive 77/91 dated 13/12/1976 of EEC on companies" in the basis for article, this expression is incomplete.
Even though Turkish lawmaker accepted the prohibition of financial assistance for harmonization with the Second Directive, it is understood that Turkish Commercial Code 380 was translated from APOK § 71a. In this framework, the facts that the article heading of TTC 380 is deception of law similarly to APOK § 71a, the difference of translation in APOK § 71a.1 was transferred to domestic law while introducing the provision of Directive, and the second subparagraph of the said article in both law systems regulate the same subject that is irrelevant to prohibition of financial assistance indicate that the resource of TTC 380 is APOK § 71a. However, as it will also be addressed in the context of the exceptions to the prohibition, while TCC 380.1 was being adopted from APOK § 71a.1, it would not be wrong to say that a translation mistake was made. In TCC 380.1, it was stated that the imposed nullity sanction would not apply for transactions of credit and financing institutions that are in scope of business matters. It should be stated that, the expression translated as "business matters" is referred as "laufende Geschafte" in the resource. Upon reviewing the dictionary meaning, it may be seen that laufende Geschafte should be more suitably translated as current transactions. Indeed, a similar issue is seen in TTC 356 regulating the assets bought out by company within two years as of association. Upon reviewing the process of enactment, it may be suggested that Article 380 in the Draft Law was admitted without any changes by the Justice Commission and General Assembly of Grand National Assembly of Turkey.
However, a consideration should be pointed out here: As it was mentioned before, Second Directive was subjected to a reform in relation to prohibition of financial assistance as well in 2006. Turkish lawmaker did not remain indifferent to such amendments of Second Directive. Indeed, upon a proposal submitted during the discussions in General Assembly of Grand National Assembly of Turkey, TCC 379 which regulates acquisition by a company of its own shares was approved following harmonization with the 2006 amendment of Second Directive. Since a similar proposal was not submitted for Article 380, the provision was enacted as given in the Draft. It may be suggested that lawmaker, being aware of the reform of Second Directive in 2006, intended to keep the prohibition of financial assistance as is in German law.
TCC 380.1, which compromise prohibition of financial assistance, was approved to be aligned with the EU law. In essence, the Second Council Directive of the EU (77/91/EEC) is derived from the UK law and England put so much effort to have the Directive approved. In the coming years, the legitimacy of the prohibition of financial asistance was discussed not only in the English law but also in the EU law. Consequently, The Second Directive of the EU amended in 2006, relaxing the prohibition. However, this relaxation has not adopted in Turkish law.
Even though Turkey is not a member state of the EU, it transfers the union acquis to the domestic law as being a negotiating country. Accordingly, many legal arrangements in Turkish private law are approved in order to be aligned with union acquis including "prohibition of financial asistance". However, it should be stated that EU Directives are not binding on Turkish law under the scope of Treaty on the Functioning of the European Union Article 288.3. as Turkey is not an officially member of the EU. The fact remains that lack of legal arrangement on impact of EU Directives on Turkish law does not mean that these directives are insignificant for the Turkish law enforcement. Referenced interpretation takes an important place in Turkish law. In order to be able to solve the problems related to interpretation of the TCC 380, it is vital to have a deep understanding of the EU Directive.
Given the transactions prohibited by the provision, the view that Turkish Commercial Code 380 only aims for protecting company assets is revealed by itself. Indeed, there is no conflict in this regard in today's German doctrine. The conflict is rather about whether the prevention of deception of law is also included in the purposes of the provision. Protection of company shareholders and creditors was aimed for through the prevention of enabling access of the acquirer of shares to the company assets. In order for financial assistance prohibition to be implemented there should be an acquistion of the company's share, there should be a financial assistance provided and there should be a relation between acquisition of the shares and transaction of financial assistance. However, Since the law is new the scope and implementation of financial assistance prohibition is still a grey area in Turkey. Lack of established market practice and solid court of appeals precedent regarding the financial assistance prohibition has led to an ambigious zone for LBOs.
It is an undeniable reality that uncertainty is never a good thing in law. On top of that this provision creates a material obstacle with respect to facilitate acquisition financing via share purchase transaction. In the light of this provision, The Company law of Turkey do not let companies to use their assets or resources or present them as collateral for the sale and purchase of their own shares and thereby potentially affecting the growth in capital entry in Turkey. By enacting prohibition that is not based on the latest amendment to the Directive, the TCC will undoubtedly be deemed as a step backwords on the road to EU membership and required legislative harmonisation with the EU. Therefore, it would be better if the scope of Article 380 of the New TCC would be clarified and preferably amended in order to attain to the economic order of the world by bringing distinctions between private and public companies as well as providing explicit guidelines to a controlled financial assistance mechanism and to promote economic growth.
If no change happens with the TCC 380, it will continue to prohibit financial assistance by the target company and if there is a problematic transaction and it it is brought before the court, there could be some serious argument to claim that the merger itself is subject to sufficient protective rules to make sure no shareholder or creditor is damaged. Therefore, the extension of the financial asistance prohibition to it is unnecessary and misplaced. It is more likely that instead of being a wilful intention of the Turkish legislator, the academic commission drafting the new TCC started its works before the revision of the Directive in 2006 and based itself on the older, more conservative one. Finally, if the prohibition of financial assistance will prevent certain structures like the merger of the HoldCo with the Opco is a grey area and there should be further study to figure it out.