One issue frequently raised in takeovers in Turkey is the possibility of a squeeze-out. The oft-repeated answer to this question will soon change, due to the enactment of the New Turkish Commercial Code (Law No. 6102 or the "New TCC") that will enter into force on 1 July 2012. The New TCC, in contrast to the Turkish Commercial Code (Law No. 6762) currently in force, introduces the squeeze-out procedure into Turkish law by entitling the controlling block to forcibly acquire shares held by a minority block.
Squeeze-Out by the Parent Company
Article 208 of the New TCC provides for granting the squeeze-out right to the shareholder who controls, directly or indirectly, at least 90% of the share capital and having at least 90% of the voting rights (i.e., the parent company)1 in a joint stock corporation. Accordingly, the controlling shareholder is entitled to exercise its right through application to the relevant court, if the minority shareholder(s) acts in a manner so as to obstruct the company's operations, acts in bad faith, creates perceptible disruption in the company or acts recklessly. In addition, as the controlling shareholder has the majority of votes in the subsidiary, and since the squeeze-out is carried out at its request, the adoption of the decision is in fact already certain in advance.
In this squeeze-out process, the purchase price of the minority shareholder(s)'s shares will be the stock exchange price if the shares are publicly traded. If they are not, or if the stock exchange price does not correspond to a fair value, then their actual value or the amount determined by the court as per a generally accepted method is used. The New TCC expressly requires the "squeeze-out compensation" to be fair and equivalent to the real value of the shares, with the purpose of protecting the rights of the minority shareholder(s), but omits a clear and definite description of "fair." Hence, "squeeze-out compensation" will undoubtedly turn out to be a crucial point in many squeeze-out procedures in the future, and the method of determining the fair value of the shares for the payment of such compensation is expected to be further delineated by the precedents of the courts after entry into force of the New TCC (i.e. as of 1 July 2012).
Squeeze-Out in the Case of Merger
Inspired by the Federal Act of Switzerland on Merger, Demerger, Transformation and Transfer of Assets of Switzerland (Bundesgesetz über Fusion, Spaltung, Umwandlung und Vermögensübertragung), the New TCC provides an exemption to the main principle of "continuation of the shareholding of a shareholder" and allows a squeeze-out of the minority shareholders in the case of a merger.
Pursuant to Article 141 of the New TCC, in a merger agreement, the legal entities involved in the merger may compel the shareholder(s) of the dissolving company to sell its/their shares merely by providing compensation through payment (without the shareholders being offered a choice).2 In such a case, the minority shareholders of the dissolving entity will not be entitled to obtain shares in the surviving entity, but instead will be paid "squeeze-out compensation." The amount of the compensation and the reasons as to why only compensation is paid, instead of granting equity and membership rights, must be explicitly stated in the merger report.
That being said, the very high quorum stipulated in Article 151 of the New TCC narrows the scope of implementation of such squeeze-out procedure (i.e. provision of only compensation payment). Accordingly, if the shareholders of the merging entity are given no choice in the matter, forcing the minority shareholder(s) of the dissolving entity to accept the compensation payment, shareholders holding 90% of the voting rights of such dissolving entity must approve the merger agreement. Pursuant to the reasoning of this Article, the shareholders who are to be squeezed out – whose names are set out in the merger agreement approved by the foregoing quorum – are not entitled to raise any objection against the relevant squeeze-out resolution of the general assembly. This authority to eliminate the minority shareholders aims to give internal peace to the surviving entity. It is also worth mentioning that the minority shareholder who may not argue with the respective general assembly is nevertheless entitled to oppose the amount of the compensation payment.
In addition, according to the reasoning of Article 141 of the New TCC, the compensation payment may be made in cash or in assets and/or other shares.3 In the event that the compensation is paid in cash, such amount is to be set aside from the legal reserves that may be disposed of by the company without any restriction, and may not be paid from the share capital of the company.
Conclusion
All in all, following the entry into force of the New TCC, it will be possible under Turkish law for the controlling shareholder (on the condition that it holds the required amount of shares) to interfere with the right of ownership of the minority shareholder(s) in its subsidiary, and in the case of a merger, for the surviving entity to buy the shares of the minority shareholder(s) of the dissolving entity, provided that the strict requirements under the New TCC are fulfilled.
Footnotes
1. The term "controlling shareholder" (hakim ortak) is defined as (i) the capital company that directly, or indirectly, holds the majority of the voting rights of another capital company, or is entitled to appoint members who constitute the majority and who may adopt a resolution binding the company to the management organ of another capital company, or that holds the majority of the voting rights in its sole proprietorship, or together with other shareholders on the basis of an agreement; or (ii) the capital company that achieves dominance over another capital company by virtue of an agreement or any other method.
2. Alternatively, the legal entities involved in the merger may also allow the shareholders of the merging entity to choose either equity or membership rights, or a compensation payment. In this respect, the New TCC provides a fair exit to the shareholders who do not intend to participate in the relevant merger transaction.
3. As compensation may be paid in the form of shares in another entity not directly involved in the merger, a so-called "triangular merger" (üç köşeli birleşme) will be possible in Turkey.
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