Leveraged buyout regulations within the scope of turkish commercial law

Abstract

“Leveraged buyout” (LBO) is one of the most preferred methods in company acquisitions. LBO is a basically private group of investors coming together and borrowing money to purchase the control of a (Target) Company. According to this method, if more loan money is put in the company instead of capital, income as well as profitability of the company will increase and the fewer money is spent from the capital. Leveraged Buyout transactions have three main legal aspects: The buyer acquires controlling shares of the company; Financing the acquisition price largely through loans from third parties; The loans used are ultimately either fully or largely secured by the Target Company’s assets. In substance, the main principle in joint stock companies is the protection of capital. Whereas for leveraged buyout models, the final source of collateral is the capital or assets of the Target Company. Therefore, different laws have forbidden this process, and in Turkish Law, this kind of financing is considered null and void to the extent that it is associated with the financial assistance prohibition. This acquisition method was freely applied in Turkey without any legal restriction until 1 July 2012, which is the date of the Turkish Commercial Code No. 6102 (“TCC”) entry into force. TCC (Art. 380) stipulates that “legal transactions involving advance payments, provision of loans or security, which are carried out by a company with another person for the purpose of acquisition of the company’s shares, shall be null and void”. Financial aid prohibition regulated in TCC is subject to significant criticism in doctrine, especially in terms of the amendment (2006/68/EEC) in the Second Directive of the European Union, which enables financial assistance to third parties under certain conditions. In order to harmonize the amendment made in the Second Directive, it is suggested an amendment similar to the Second Directive may be considered in Art. 380 of the TCC, and thereby the strict ban is softened.