January 2020
The Communiqué on the Principles regarding the Revocation of Privileges on Voting Rights and Nomination to the Board of Directors was published in the Official Gazette dated 10 January 2020 and numbered 31004 (the “Communiqué”) and entered into force on the same day. The Communiqué, which was prepared by the Capital Market Board (the “Board”) as per the Capital Markets Law, numbered 6362 and published in the Official Gazette dated 30 December 2012 and numbered 28513 (the “Law”), regulates the principles regarding the revocation of privileges on voting rights and nomination to the board of directors in publicly traded companies.
This Monthly Updates aims to highlight the new principles introduced by the Board for publicly traded companies with respect to certain privileges granted in case such companies face economic difficulties.
Scope of the Communiqué
Pursuant to the Communiqué, the privileges granted with respect to voting rights and nomination of directors to the board by any publicly traded companies shall be revoked by the decision of the Board in case such companies declare loss for five financial years consecutively based on their financial statements. In accordance with the Provisional Article 1 of the Communiqué, aforementioned five-year period shall be started from (i) the financial year ending on 31 December 2013 in publicly traded companies whose accounting period is determined as the calendar year; and (ii) the specialised annual accounting period ending in 2014 in publicly traded companies with an agreed specific accounting period.
The principles stipulated in the Communiqué shall be applied to the shareholders who have privileges regarding voting rights and nomination to the board of directors in such companies, provided that, public institutions or organisations holding such privileges as the shareholders of the publicly traded companies, shall be exempted from the scope of the Communiqué.
Principles Regarding Revocation of such Privileges
Since the Communiqué introduces regulations by means of revocation of two specific privileges granted to the shareholders of the publicly traded companies with respect to voting rights and nomination to the board of directors; the content of such privileges should be considered in detail for a proper understating of the principles stated in the Communiqué. In this context, the privileges relating to voting rights are defined in the Communiqué as having different number of voting rights granted to the shares with equal nominal values, whereas privileges relating to nomination to the board of directors are defined in the Communiqué as privileges regarding to the nomination to the board of directors granted to (i) certain share groups; (ii) shareholders who constitute a certain group in terms of their characteristics and qualifications; or (iii) shareholders that represent the minority.
As per the Communiqué, above mentioned privileges shall be revoked by the decision of the Board, if publicly traded companies have been making loss for five years consecutively according to their financial statements. In this context, in order to avoid such decision, publicly traded companies shall submit their disclosures regarding their activities which unavoidably caused a loss in the accounting period of entire five years or any of five year, if any, to the Board within 20 business days following the public disclosure of their financial statements for the fifth fiscal year.
The Board shall take into consideration of such companies’ declarations regarding recent adverse developments which may have an impact on the economy, sector or specifically on such publicly traded company in its evaluation.
In line with the Communiqué, if a publicly traded company is subject to an independent audit, the determination of the loss regarding the five-year period shall be based on the audited financial statements disclosed to the public. Accordingly, if the independent audit delivered a qualified opinion regarding the financial statements to be used for the determination of the loss, the qualification will be considered by the Board in its decision. Moreover, in the event that, the independent auditor (i) delivers an adverse opinion; or (ii) avoids giving an opinion; such company shall be granted with an eight-month period following the submission of the financial statements to the board of directors where the financial statements shall be re-issued. During such eight-month period, the Board shall not decide on the revocation of privileges regarding voting rights and nomination to the board of directors. In this regard, if an unqualified opinion is not submitted to the board of directors within such eight-month period, the initial financial statement shall be ex officio considered by the Board and such company shall be considered in loss.
Amendments to the Articles of Association
Since the privileges on voting rights and nomination of directors to the board revoked by the Board are granted to shareholders within the scope of the articles of associations of publicly traded companies, the Board’s decision on the revocation of such, shall be in contradiction with the articles of associations of such companies. Accordingly, in order to resolve the contradiction, publicly traded companies will be obliged to apply to the Board in order to make necessary amendments to their articles of association within the two months following notification of the Board’s revocation decision. Upon receiving the Board’s approval, the publicly traded companies shall resolve on the amendments in their first upcoming general assembly. In accordance with the Communiqué, if (i) no application regarding the amendment to the articles of association is made to the Board within two months; or (ii) the approved amendments of the articles of association are not included in the agenda of the general assembly, the Board shall include the related item to the agenda within the scope of the Law without complying with the principle of adherence to the agenda.
In the light of all above-mentioned proceedings, the board of directors shall be responsible for the compliance of such publicly traded companies with the procedures and principles set out in this Communiqué.
Obligation to Make a Takeover Bid
As per the Communiqué, even if the Board’s decision regarding the revocation of privileges on voting rights and nomination to the board of directors, causes a situation whereby certain shareholders take the control as a result of having more than fifty percent of voting rights in a publicly traded company, it shall not trigger the mandatory tender rules under Article 26 of the Law and Communiqué on Takeover Bids published in the Official Gazette dated 23 January 2014 and numbered 28891.
Notifications to be Made by the Board
According to the Communiqué, after the articles of association is duly amended, the Board shall notify the Central Securities Depository in order to amend the status of the shares for which the privileges are revoked, into non-privileged. Moreover, with the aim of avoiding such privileges being exercised by the shareholders in the general assemblies, the Board shall notify the Ministry of Commerce regarding the Board decision as well.
Conclusion
The Communiqué regulates procedures regarding the revocation of privileges granted on voting rights and nomination of directors to the board in order to protect small investors against privileged shareholders who have the power to manage such companies and/or influence their management. Although it may be considered as a Board intervention to publicly traded companies’ operations, the competent authorities stated that the Communiqué aims only to revoke such privileges, not to appoint a trustee or a board member to such companies causing an impact on their management.