Share Buybacks in Publicly Held Companies

Introduction

The acquisition by joint stock companies of their own shares is an area of corporate law subject to specific regulation, particularly from the perspective of protecting corporate assets, maintaining capital and preserving the balance of interests among shareholders. In the case of publicly held companies, however, share buybacks assume significance beyond this traditional corporate law framework. Transactions by a company in its own shares may directly affect the market price and trading volume of those shares and, consequently, influence investor decisions and the functioning of the market. Share buybacks are therefore additionally regulated under capital markets legislation with a view to protecting investors, ensuring timely and adequate disclosure and preserving market integrity.

The Communiqué on Buy-Backed Shares No. II-22.1 (the “Communiqué”), issued on the basis of Articles 22, 48, 101 and 108 of Capital Markets Law No. 6362 (the “CML”), constitutes the principal regulatory framework governing the acquisition or acceptance as collateral by publicly held companies of their own shares. The Communiqué regulates not only the conditions under which shares may be repurchased, but also the preparation and approval of buyback programmes, transaction limits, public disclosure obligations, the rights attached to repurchased shares and the principles applicable to their subsequent disposal or cancellation.

Against this background, a share buyback should not be regarded merely as a management decision concerning a company’s financial strategy or share price. Rather, it constitutes a comprehensive legal process that gives rise to various capital markets obligations from the initial decision-making stage through to completion of the relevant transactions.

Legal Framework and Authorisation of Share Buybacks

For the purposes of the Communiqué, a buyback broadly refers to the acquisition of a company’s shares by the company itself or by its subsidiaries. The scope of the regulation, however, is not limited to direct acquisitions. Under Articles 2 and 4 of the Communiqué, transactions producing substantially the same economic result, such as the acquisition of the parent company’s shares by a subsidiary or an acquisition by a third party in its own name but for the account of the company or its subsidiary, may also fall within the buyback regime. Similarly, the provision of advances, loans or security to third parties for the purpose of facilitating the acquisition of the company’s shares may, under certain circumstances, be treated within the same framework.

This broad approach is intended to prevent the buyback regime from being circumvented through indirect transaction structures. Accordingly, whether a particular transaction falls within the scope of the Communiqué should be assessed by reference not only to its legal form but also to its economic substance and to the person for whose account the relevant shares are ultimately acquired.

The principal authorisation mechanism for share buybacks is set out in Article 5 of the Communiqué. As a general rule, a buyback programme prepared by the board of directors must be approved by the general assembly, thereby authorising the board to conduct the relevant transactions. Unless the articles of association prescribe more stringent requirements, the general meeting and resolution quorums stipulated under Article 418 of the Turkish Commercial Code No. 6102 (the “TCC”) apply to the general assembly meeting at which the programme is considered.

A buyback programme does not constitute a general and unrestricted authority for the board to deal in the company’s shares. Article 8 of the Communiqué instead requires the principal parameters of the contemplated transactions to be determined in advance. These include the purpose and duration of the programme, the maximum number of shares that may be acquired, the lower and upper price limits, the amount and source of the funds allocated to the buyback, the principles governing the subsequent disposal of the shares and the anticipated impact of the programme on the company’s financial position and operating results. Information concerning shares previously repurchased but not yet disposed of, as well as any benefits that may accrue to related parties, must also be addressed in the programme.

Within this framework, the general assembly determines the principal parameters of the buyback, while the board of directors exercises the authority granted to it within those parameters. The programme therefore performs an important function both in ensuring that shareholders are informed in advance and in defining the limits of the board’s authority.

An exception to the general authorisation requirement applies to companies whose shares are traded on the stock exchange. Article 5 of the Communiqué permits the board of directors to resolve on a buyback without prior general assembly authorisation where this is necessary to avoid an imminent and serious loss. An imminent and serious loss is deemed to exist where, during the month preceding the board resolution, the daily weighted average price of the company’s shares has traded below their nominal value or has declined by more than twenty per cent. Where these circumstances are not present, a buyback based solely on a board resolution requires the prior approval of the Capital Markets Board of Türkiye (the “CMB”).

This mechanism should not be regarded as an alternative to the ordinary general assembly authorisation procedure, but rather as an exceptional tool enabling listed companies to respond promptly to extraordinary market conditions.

Transaction Limits and Public Disclosure

Given the potential impact of share buybacks on a company’s capital and equity structure, the Communiqué imposes various limitations on both the size and funding of the relevant transactions. Under Article 7, a buyback programme approved by the general assembly may remain in force for a maximum of three years for companies whose shares are traded on the stock exchange and one year for publicly held companies whose shares are not exchange-traded. Longer periods may apply where buybacks are conducted in connection with employee share ownership programmes or for the purpose of satisfying obligations arising from convertible or exchangeable capital market instruments.

The principal quantitative limitation is set out in Article 9 of the Communiqué. Taking previous acquisitions into account, the nominal value of repurchased shares may, as a general rule, not exceed ten per cent of the company’s paid-in or issued capital. In addition, the total consideration paid for the repurchased shares may not exceed the aggregate amount of resources available for profit distribution under CMB regulations. Compliance with this financial limitation must be assessed on the basis of the latest annual financial statements approved by the general assembly, and the board of directors is responsible for ensuring that the applicable conditions are satisfied before the buyback is carried out.

For companies whose shares are traded on the stock exchange, the shares acquired must also be of an exchange-traded type and, as a general rule, the transactions must be executed on the market on which those shares are traded. This requirement seeks to ensure that buybacks are carried out through a transparent market mechanism and in a manner consistent with the equal treatment of shareholders.

The timing of a buyback is equally significant. A company’s purchase of its own shares while it possesses information that has not yet been disclosed to the market may create substantial information asymmetry between the company and investors. Article 10 of the Communiqué therefore prohibits buyback and sale transactions where the company has inside information whose disclosure has been delayed. Restrictions also apply during certain stages of a capital increase process.

Article 11 extends this protection to transactions carried out by certain shareholders. Where an approved buyback programme is in force or the board has resolved to conduct a buyback for the purpose of avoiding an imminent and serious loss, sales on the stock exchange by shareholders holding management control of the company and persons closely associated with them are restricted for the relevant period. The purpose of this rule is to reduce the risk of misleading the market by preventing controlling shareholders from selling their holdings while the company itself is generating buy-side demand for its own shares.

Public disclosure constitutes another fundamental element of the buyback regime. Article 12 of the Communiqué establishes a disclosure framework that applies from the initial decision-making stage until completion of the programme. The programme prepared by the board must be made public before the relevant general assembly meeting, and any amendments adopted by the general assembly must also be disclosed. Before actual purchases commence, information concerning the contemplated transaction period and the amount of shares intended to be repurchased must be provided to the market.

The disclosure obligation does not end with the announcement of the programme. Material information concerning completed buyback transactions, including their amount, price and ratio to the company’s capital, must subsequently be disclosed. Where treasury shares are later sold, information concerning the relevant sale and the resulting gain or loss must similarly be made public. Once the buyback period or programme has been completed, the aggregate results must be disclosed and presented to shareholders at the first subsequent general assembly meeting.

Viewed as a whole, these requirements demonstrate that public disclosure is not merely a procedural obligation attached to the buyback process but an integral component of its legal framework.

Market Integrity and the Legal Status of Repurchased Shares

Transactions by a publicly held company in its own shares may naturally affect the market price and trading volume of those shares and are therefore particularly significant from the perspective of the CML provisions on insider dealing and market manipulation. Articles 14 and 15 of the Communiqué accordingly regulate the circumstances and manner in which buyback transactions may be carried out from a market integrity perspective.

Where the conditions stipulated under Article 14 are cumulatively satisfied, certain buyback transactions may benefit from the exemption provided under Article 108(1)(b) of the CML. Broadly, the transaction must be conducted under a programme approved by the general assembly, pursue one of the purposes recognised under the Communiqué and comply with the applicable restriction on sales of repurchased shares during the programme period. Transactions that do not satisfy these conditions may, depending on their particular circumstances, be reviewed under the provisions of the CML concerning market abuse, insider dealing and market manipulation.

For companies whose shares are traded on the stock exchange, the actual execution of buyback transactions is also subject to the transaction principles under Article 15 of the Communiqué. These provisions impose limitations concerning matters such as the timing of transactions, price orders and transaction volumes. Accordingly, the existence of a commercially or financially legitimate purpose for a buyback is not sufficient in itself; the manner in which the transaction is executed in the market must also comply with the applicable capital markets regulations.

Repurchased shares also acquire a particular legal status for so long as they remain in the hands of the company or its subsidiary. Under Article 18 of the Communiqué, treasury shares are not taken into account when calculating the quorum at general assembly meetings. Shares held directly by the company do not confer shareholder rights other than dividend and pre-emptive rights, while voting rights and related rights attached to shares in the parent company acquired by a subsidiary are automatically suspended.

The suspension of such rights is temporary and continues only for so long as the shares remain in the hands of the company or its subsidiary. Once the shares are transferred to a third party, the shareholder rights attached to them revive automatically.

The underlying purpose of these rules is to prevent a company from using its own shares to artificially influence the will of the general assembly or alter the balance of control within the company.

Disposal of Repurchased Shares and Liability of the Board of Directors

The legal consequences of a buyback do not end when the shares are acquired. Article 19 of the Communiqué separately regulates the circumstances in which repurchased shares may be retained, disposed of or cancelled by way of a capital reduction.

Shares repurchased in compliance with the applicable rules may, subject to continued compliance with the quantitative and financial conditions under the Communiqué, be held indefinitely. By contrast, shares acquired in breach of the Communiqué must, as a general rule, be disposed of within one year from the date of acquisition. Where they cannot be disposed of within that period, they must be cancelled through a capital reduction. Additional disposal or cancellation requirements may arise in respect of shares exceeding the applicable ten per cent threshold.

Companies whose shares are traded on the stock exchange may, subject to the restrictions under the Communiqué, dispose of repurchased shares through sales on the exchange either during the programme or after its completion. In this context, the restrictions applicable to simultaneous buyback and sale periods, as well as the specific rules governing sales to related parties, must also be taken into account.

Throughout this process, the board of directors assumes a central role and a corresponding degree of responsibility. Article 22 of the Communiqué expressly provides that members of the board of directors are responsible for transactions carried out by the company within the scope of the Communiqué. This responsibility extends beyond the preparation of the programme and implementation of the general assembly resolution. The board must assess whether sufficient and legally available financial resources exist for the buyback, ensure compliance with the applicable quantitative limitations, refrain from conducting transactions during prohibited periods, ensure timely fulfilment of disclosure obligations and supervise the subsequent holding, disposal or cancellation of the repurchased shares in accordance with the applicable rules.

A buyback decision should therefore be approached not merely as a commercial decision relating to the company’s share price or financial strategy, but as a decision capable of giving rise to regulatory and legal consequences for the members of the board of directors.

Conclusion

Share buybacks provide publicly held companies with an important tool for managing their capital structures, implementing employee share ownership programmes, satisfying obligations arising from certain capital market instruments and, in exceptional market conditions, taking measures against serious losses that may affect the company. At the same time, the ability of transactions in a company’s own shares to influence market prices, trading volumes and investor behaviour requires such transactions to be conducted within a detailed regulatory framework.

The Communiqué on Buy-Backed Shares No. II-22.1 accordingly regulates the buyback process as a whole rather than limiting its scope to the acquisition of the shares themselves. Its framework extends to corporate authorisation, the contents of the buyback programme, financial and quantitative limits, public disclosure, market integrity, the rights attached to repurchased shares and their subsequent disposal or cancellation.

Accordingly, a publicly held company contemplating a share buyback should consider the economic rationale for the transaction together with the applicable authorisation procedure, available financial resources, transaction limits, restrictions relating to inside information and capital increases and continuing disclosure obligations. Observance of transparency, equal treatment of shareholders and market integrity throughout every stage of the process is important both for ensuring the company’s compliance with capital markets legislation and for managing the potential liability of the members of its board of directors.