Authors: Banking & Finance Law Department, Atty. Mustafa Şahin

Introduction

The banking sector is subject to a comprehensive regulatory and supervisory framework, distinct from that applicable to other commercial activities, with the aim of safeguarding confidence and stability in the financial system. In this respect, banks are required to ensure that not only their financial structures but also their shareholding structures, management and operations comply with the requirements prescribed under the applicable legislation.

Recent decisions concerning the exercise of certain shareholders\' rights by the Savings Deposit Insurance Fund (\"SDIF\" or the \"Fund\") have once again brought the scope and legal implications of regulatory intervention in the banking sector to the forefront.

Banking Law No. 5411 (the \"Banking Law\" or the \"Law\") establishes various intervention mechanisms addressing irregularities arising from banks\' shareholding structures and deterioration in their financial condition. These mechanisms may give rise to different legal consequences, ranging from the exercise of certain shareholders\' rights by the Fund to the revocation of a bank\'s operating license.

In this context, the legal grounds for regulatory intervention in banks\' shareholders\' rights, the conditions governing the transfer of shareholders\' rights other than dividend rights, together with management and supervision, to the Fund, and the implications of such interventions for shareholders and banks\' contractual relationships are examined below.

Legal Basis for Intervention in Shareholders\' Rights

Article 8 of the Banking Law sets forth the qualifications required of bank founders. These include possessing the necessary financial strength and reputation, demonstrating the honesty and competence required for the conduct of banking activities, and not being subject to the legal or criminal disqualifications specified therein.

Pursuant to Article 18 of the Law, shareholders holding qualified shares in banks are also required to satisfy the qualifications prescribed for founders. Under Article 3 of the Law, qualified shares refer to shares representing, directly or indirectly, ten percent or more of a company\'s share capital or voting rights, as well as shares granting the privilege of appointing members to the board of directors, irrespective of whether such shares reach the ten percent threshold.

Under the fifth paragraph of Article 18 of the Law, holders of qualified shares who cease to satisfy the qualifications required of founders are prohibited from exercising their shareholders\' rights, except for dividend rights. In such circumstances, the relevant shareholders\' rights are exercised by the SDIF upon notification by the Banking Regulation and Supervision Agency (\"BRSA\").

Accordingly, while the voting rights and management participation rights of the relevant shareholders are restricted, their dividend rights remain protected. Furthermore, such shareholders are prohibited from exercising their pre-emptive rights until their direct and indirect shareholdings fall below ten percent of the bank\'s share capital.

However, the exercise of shareholders\' rights other than dividend rights by the Fund under Article 18 is not limited to circumstances in which holders of qualified shares cease to satisfy the qualifications required of founders. The same Article also provides that where share transfers are carried out without obtaining the required approval of the Banking Regulation and Supervision Board (the \"Board\"), the shareholders\' rights attached to the relevant shares, excluding dividend rights, shall be exercised by the Fund. Moreover, share transfers carried out without the required approval may not be registered in the share ledger, and any entries made in violation of this requirement are invalid.

An important consideration regarding the legal nature of these interventions is that the exercise of shareholders\' rights by the Fund does not, in itself, result in the transfer of ownership of the relevant shares to the Fund. Therefore, the exercise of certain shareholders\' rights under Article 18 and the transfer of shareholders\' rights other than dividend rights, together with the management and supervision of a bank, to the Fund under Article 71 constitute distinct legal mechanisms.

Revocation of Operating Licenses and Conditions for Transfer to the Fund

In addition to measures concerning shareholders\' rights, the Banking Law provides for more extensive intervention mechanisms where a bank\'s financial condition deteriorates or its continued operations pose a risk to the financial system.

Articles 67 to 70 of the Law regulate corrective, rehabilitative and restrictive measures that may be imposed where certain irregularities or risks are identified through supervisory examinations. Such measures include increasing shareholders\' equity, restricting risky transactions, limiting banking activities and implementing changes to management structures.

Article 71 of the Law establishes a specific mechanism for the revocation of operating licenses or the transfer of shareholders\' rights other than dividend rights, together with the management and supervision of credit institutions, to the Fund in more serious circumstances.

In particular, the intervention powers prescribed under Article 71 may be exercised where one or more of the following circumstances exist:

• The measures required under Article 70 have not been implemented, in whole or in part, within the period specified by the Board or, in any event, within a maximum period of twelve months, or it has been determined that the bank\'s financial condition cannot be strengthened despite the implementation of such measures, or that such measures would be insufficient to restore its financial condition.
• The continuation of the bank\'s operations poses a threat to the rights of depositors and participation fund holders or to confidence and stability in the financial system.
• The bank is unable to fulfill its obligations as they fall due.
• The total value of the bank\'s liabilities exceeds the total value of its assets.
• The controlling shareholders or managers have caused losses to the bank by directly or indirectly using, or causing the use of, the bank\'s resources for their own benefit in a manner that jeopardizes its safe and sound operation.

Where one or more of these circumstances exist, the Board is authorized, by a decision adopted with the affirmative votes of at least five of its members, to revoke the bank\'s operating license or to transfer the shareholders\' rights other than dividend rights, together with the management and supervision of a credit institution, to the Fund for the purpose of its partial or complete transfer, sale or merger, subject to the losses being deducted from the capital of the existing shareholders.

In this respect, the decision-making quorum prescribed under Article 71 and the requirement to deduct losses from the capital of the existing shareholders constitute fundamental elements of the relevant intervention mechanism. In particular, the requirement concerning the deduction of losses demonstrates that the transfer process may also have implications for the economic interests of existing shareholders.

Furthermore, decisions adopted by the Board pursuant to Article 71 are published in the Official Gazette, and the date of publication is deemed to constitute the date of notification to the relevant parties. This provision is particularly significant for determining the applicable time limits for administrative and judicial remedies against such decisions.

Accordingly, while interventions under Article 18 of the Law primarily concern the legal eligibility of shareholders and regulatory requirements governing share transfers, interventions under Article 71 are based on more serious risks and violations relating to the bank\'s financial condition, the sustainability of its operations, misuse of banking resources and protection of the financial system.

Legal Consequences of SDIF Intervention

The legal consequences arising from the exercise of shareholders\' rights by the SDIF or the transfer of shareholders\' rights other than dividend rights, together with the management and supervision of a bank, to the Fund vary depending on the legal basis and scope of the intervention.

The exercise of shareholders\' rights other than dividend rights in respect of certain shares under Article 18 of the Law does not, in itself, result in the revocation of the bank\'s operating license, termination of its legal personality or commencement of liquidation proceedings.

In such circumstances, the bank may continue its operations in accordance with the applicable legislation and remains a party to its existing legal relationships. Nevertheless, depending on the scope of the voting and management participation rights exercised by the Fund, changes may occur in the bank\'s corporate governance structure.

Conversely, where shareholders\' rights other than dividend rights, together with the management and supervision of a bank, are transferred to the Fund pursuant to Article 71 of the Law, the special powers provided under Article 107 become applicable.

Within this framework, the Fund may, in accordance with the principles of cost efficiency and preservation of confidence and stability in the financial system, temporarily suspend the bank\'s operations, transfer certain assets and liabilities, and request the revocation of the bank\'s operating license, subject to the conditions prescribed under the Law. Furthermore, where the relevant statutory conditions are satisfied, the Fund may provide financial assistance, assume certain losses and acquire shares in the bank.

Where the majority or all of the bank\'s shares have been transferred to the Fund, additional powers under Article 107 may become applicable, including restructuring, capital increases, transfers of assets and liabilities, mergers and sales.

Article 107 also establishes specific time limits governing the restructuring process following the transfer to the Fund. Accordingly, the process relating to the strengthening of the bank\'s financial condition, restructuring, transfer, merger or sale must be completed within nine months from the date of transfer. This period may be extended by up to three months pursuant to a resolution of the SDIF Board.

Under the Law, where the transfer, merger or sale cannot be completed within the prescribed period, the Board shall revoke the bank\'s operating license upon the Fund\'s request.

It is also essential to distinguish between the exercise of shareholders\' rights by the Fund, the transfer of management and supervision to the Fund, and the transfer of ownership of shares to the Fund. The transfer of share ownership does not arise automatically from the transfer of management powers but may occur upon satisfaction of the specific conditions prescribed under Article 107 or other applicable provisions of the Banking Law.

In this regard, the respective legal roles of the BRSA and the SDIF must also be distinguished. Under Article 18, the Fund exercises certain shareholders\' rights in the circumstances prescribed by the Law. Under Article 71, the Board is the competent authority to decide on the revocation of an operating license or the transfer of the relevant shareholders\' rights, together with management and supervision, to the Fund. Article 107, in turn, governs the special restructuring and disposal powers that may be exercised by the Fund following a transfer under Article 71.

Finally, the applicable liquidation regime also varies depending on the type of banking institution concerned. Article 71 provides that credit institutions whose operating licenses have been revoked shall be liquidated in accordance with the provisions of the Banking Law, whereas development and investment banks shall be liquidated pursuant to general legal provisions.

Implications for Banks\' Contractual Relationships

SDIF interventions are significant not only for banks\' shareholders and management but also for third parties maintaining contractual relationships with the relevant institutions.

In particular, the implications of such interventions for existing contractual obligations should be assessed in relation to loan agreements, financing arrangements, security agreements and other banking services agreements.

A decision authorizing the SDIF to exercise certain shareholders\' rights does not, in itself, extinguish the bank\'s existing contractual rights and obligations. Nevertheless, the applicability of contractual provisions concerning change of control, events of default, acceleration or termination must be evaluated in light of the wording of the relevant agreements and the legal nature of the regulatory intervention.

In particular, where ownership of the shares remains unchanged but voting and management rights are exercised by the Fund, it becomes important to determine whether the relevant contractual definitions of change of control are based exclusively on share ownership or also encompass voting rights and the ability to exercise management or control over the bank.

Furthermore, certain transfers carried out pursuant to Article 107 of the Law are subject to a special statutory regime that differs from ordinary contractual transfers based on the mutual consent of the parties. In particular, Article 107 expressly provides that the consent of creditors and debtors is not required for transfers carried out in accordance with that Article.

Consequently, where special statutory transfer powers are exercised, the enforceability and applicability of contractual restrictions on transfers, consent requirements and other relevant provisions must be assessed in conjunction with the mandatory provisions of the Banking Law.

Therefore, rather than drawing a general conclusion regarding the effects of regulatory intervention on contractual relationships, each situation should be assessed individually by considering the legal basis and scope of the relevant regulatory decision together with the applicable contractual provisions.

Conclusion

The regulatory intervention mechanisms established under the Banking Law are intended to safeguard confidence and stability in the financial system and protect the rights and interests of depositors.

Within this framework, the exercise of certain shareholders\' rights by the SDIF due to holders of qualified shares ceasing to satisfy the qualifications required of bank founders or share transfers being carried out without the required regulatory approval, and the transfer of shareholders\' rights other than dividend rights, together with management and supervision, to the Fund due to deterioration in a bank\'s financial condition or other serious risks and violations specified under Article 71, constitute distinct intervention mechanisms subject to different conditions and legal consequences.

This distinction is particularly significant when assessing the continuity of banking operations, the rights of shareholders, corporate governance structures and the legal status of existing contractual relationships with third parties.

Accordingly, identifying the appropriate legal basis and scope of regulatory intervention, distinguishing the respective powers of the BRSA and the SDIF, and considering the implications of statutory intervention mechanisms for contractual relationships are essential to determining the legal consequences of regulatory action in the banking sector.