Current Turkish Legislation
Indirect transfers of shares in Turkish intermediary companies are currently regulated by the Communique on the Principles regarding the Establishment and Activities of Investment Companies (“Communique No. III-39.1”). In particular, sub-paragraph 3 of Article 34 of Communique No. III-39.1 provides that:
“… (3) The transfer of shares in legal entities holding shares in an intermediary firm resulting in a direct or indirect change of 10%, 20%, 33% or 50% in the shareholding of the intermediary firm are subject to the approval of the Board.(…). …”
Consequently, under the current legislation, a company which directly or indirectly owns a Turkish intermediary company must obtain pre-approval from the Turkish Capital Markets Board (“CMB”) before any direct or indirect share transfer takes place which exceeds the thresholds stated in Article 34 (3) of Communique No III-39.1.
The EU legislation on the transfer of shares in intermediary companies is contained in Directive 2004/39/EC on markets in financial instruments (“MiFID”). Article 10 (3) of MiFID states that:
“Member States shall require any natural or legal person or such persons acting in concert (hereinafter referred to as the proposed acquirer), who have taken a decision either to acquire, directly or indirectly, a qualifying holding in an investment firm or to further increase, directly or indirectly, such a qualifying holding in an investment firm as a result of which the proportion of the voting rights or of the capital held would reach or exceed 20 %, 30 % or 50 % or so that the investment firm would become its subsidiary (hereinafter referred to as the proposed acquisition), first to notify in writing the competent authorities of the investment firm in which they are seeking to acquire or increase a qualifying holding”
At first glance, the EU legislation may seem very similar to the Turkish legislation. However, the key difference is the use of the term ‘qualifying holding’ in MiFID 10(3) which is defined as:
“any direct or indirect holding in an investment firm which represents 10 % or more of the capital or of the voting rights, as set out in Articles 9 and 10 of Directive 2004/109/EC or which makes it possible to exercise a significant influence over the management of the investment firm in which that holding subsists”.
The qualified holding criteria therefore limits the instances where a prior notification must be made to the regulator to scenarios where the acquirer is acquiring 10% or more of the capital or voting rights of the target. The qualifying holding criteria in MiFID can be useful in initial public offering (“IPO”) scenarios, as it is possible to avoid the need to make multiple notifications to the regulator by including a note in the IPO prospectus stating that no single acquirer will be entitled to acquire 10% or more or the shares in the target.
MiFID 10(3) is therefore focussed on controllers and the aim is to ensure that notifications are made to the regulator when a natural or legal person acquires enough shares or voting rights to control the target. This is in contrast to the more onerous Communique No. III-39.1 approach which requires the pre-approval of the CMB whenever a block of shares exceeding the stated thresholds are transferred, even in instances where no single acquirer will acquire 10% or more or the shares in the target.
Advice we have recently provided to a client in the context of a planned IPO by a foreign company which indirectly owns 100% of the shares in a Turkish intermediary company has caused us to examine the Turkish indirect share transfer provisions. In the absence of the qualifying holding criteria found in MiFID or any specific exemptions for IPOs, the wording of Article 34 (3) of Communique No III-39.1 implies that the foreign IPO would be subject to obtaining the pre-approval of the CMB, as the IPO would result in an indirect change to the shareholding structure of the Turkish intermediary exceeding the thresholds stated in Article 34 (3) of Communique No. III-39.1.
Such an application to the CMB would be impractical given that the identities of the acquirers would be unknown at the time of the application and would potentially encroach on the foreign regulator’s remit. A preliminary application was therefore submitted to the CMB requesting additional clarification regarding the Turkish requirements, and the CMB have since confirmed that the provisions of Communique No. III-39.1 requiring pre-approval do not apply to an IPO of a foreign holding company where the shares are being transferred to the public market and no shareholder whether acting individually or in concert will gain control of 10% or more of the shares in the intermediary company. Consequently, amendments are now expected to be made to the existing Turkish legislation to bring it more in line with the European Union’s approach in MiFID, however, the specific amendments are yet to be confirmed.