Overview of securities law
Although securities markets in Turkey have a long history, the recognition of securities as a separate area of law is relatively new. After the nasty experiences and substantial losses incurred by so many following the unregulated securities offerings in the 1980s, the Capital Markets Law No. 2499 (the Former CML) was introduced in July 1981. The Capital Markets Board (CMB), the Turkish capital markets regulatory and supervisory authority, was incorporated and endowed with all necessary powers under the Former CML. Since its incorporation, the CMB has undertaken a leading role and, while conducting its regulatory and supervisory role, has also supported the improvement of the markets and the innovation and introduction of new capital market instruments.
At the end of 2012, the Former CML was replaced by the new Capital Markets Law No. 6362 (CML), which was enacted in the Official Gazette of 30 December 2012. The main goal of the CML is to harmonise Turkish capital markets legislation with European Union (EU) norms and with the provisions of the new Turkish Commercial Code No. 6102. While transparency, accountability, proportionality and consistency have been regarded as key structuring principles, the general preamble of the law states that the CML is only a ‘market regulating text’. Furthermore, although the provisions seem detailed, generally the CML is a framework law and, accordingly, secondary legislation has been prepared and published by the CMB with the aim of providing more detailed provisions pertaining to specific capital markets instruments, transactions and entities conducting capital markets activities.
All the offerings are required to be approved by the CMB under the rules of the CML. It is a short and simple procedure of application to be made the CMB during offering activities. The CML also provides a validity period of 12 months for the prospectus, so unless there is an addition or amendment, it would be sufficient for issuers to conduct offerings based on the underlying prospectus without obtaining additional CMB approval, which is advantageous for market participants in terms of time and costs. For issuances excluding a public offering, an issuance certificate needs to be prepared by issuers and approved by the CMB.
The CMB offering rules that are applicable depend on the types of securities offered. As a general rule, however, while it is mandatory to prepare offering circular-type disclosure documents for public offerings, it is not mandatory for private placements or offerings targeting qualified institutional investors. For the issuance of capital market instruments without a public offering process, the law requires an issuance certificate, which must be approved by the CMB, to be prepared by the issuer.
Article 10 of the CML regulates the liability applicable for offering documents, preparation of which is mandatory and subject to CMB approval. Pursuant to Article 10 of the CML, issuers are responsible for a fair reflection of the facts in the information contained in the documents. However, as Article 10 clearly spells out, an intermediary institution, those conducting the public offering, guarantors (if any) or board members of the issuer not acting with due diligence can be held responsible for the part of the loss that cannot be indemnified by the issuers; thus, their liability is a secondary one and would be based on their negligence.
In an effort to enlarge the scope of services provided to investors in line with EU regulations, capital market instruments are redefined under the CML as securities, derivative instruments (which include leverage transactions), investment contracts and any other instrument to be determined as a capital market instrument by the CMB.
Provision of all capital market activities in Turkey is subject to CMB licensing requirements; however, foreign intermediary institutions can provide intermediary services to Turkish issuers for cross-border offerings and to Turkish investors on a reverse enquiry basis.
Corporate governance rules have been regulated by the CML, and the CMB is authorised to oblige public companies, depending on their qualifications, to comply partially or wholly with these rules, to determine principles and procedures thereto, to take decisions and to initiate lawsuits in cases of non-compliance.
Another innovation of the CML is the introduction of squeeze-out and appraisal right mechanisms. In a publicly held company, if the voting rights reach or surpass the ratio determined by the CMB as a result of a share purchase offer or any other cause, the majority shareholders will be entitled to squeeze out the minority shareholders. In these cases, the minority shareholders will also be entitled to sell their shares to the majority. In addition, shareholders opposing general assembly decisions regarding significant transactions such as certain mergers or demergers as defined under the relevant communiqué, asset transfers or changes in the company type will have the right to sell their shares to the company and exit. The public company may pass a board of directors’ resolution and decide to initially offer the shares of the shareholders exiting the company, to other remaining shareholders or third-party investors before these are purchased by the public company itself. A shareholder holding shares on the public disclosure date of the significant transaction is eligible to exercise its right to exit. When a shareholder exercises its right of exit, the public company, whose shares are listed in the exchange, is obliged to purchase the shares of the exiting shareholder with the purchase conducted on the basis of fair-price criteria.
In addition to the capital market offences defined in the CML, which include insider trading, transaction and information-based market manipulation, unapproved offerings, unlicensed capital market activities, embezzlement and repurchase agreements lacking underlying assets, there is the concept of market abuse actions. Market abuse actions can generally be described as activities that cannot be justified on any reasonable economic or financial grounds and that disrupt the trustworthy, transparent and stable functioning of the stock exchange and other organised markets.
As well as governing capital market offences, the CML regulates the administrative, pecuniary sanctions of the CMB. Accordingly, the CMB has the authority to impose administrative fines for violations of the regulations, standards and forms, or of the general and special decisions it issues. Administrative fines imposed by the CMB may be challenged in Turkey’s administrative courts. The CML significantly increased the upper limit of administrative fines for general violations as a deterrent to these kinds of offences; the limit, which is subject to annual re-evaluation by the CMB, is set at 872,282 Turkish lira for 2022. For transactions that disturb market conditions, however, and depending on the case, the CMB can impose administrative fines of up to 1,746,185 Turkish lira (for 2022, subject to annual re-evaluation by the CMB).
Intermediary activities in Turkey, including marketing activities, can only be conducted by intermediary institutions with licences granted by the CMB. Conduct against this rule constitutes a criminal offence as defined in the CML.
Foreign investment banks that are party to international sales of Turkish securities do not have legal standing before the CMB as authorised intermediary institutions. In deals where international and domestic offerings are realised concurrently, investment banks and international investors are treated as ordinary investors participating in a public offering realised in Turkey.
The CMB requests and reviews international offering circulars with the intention of protecting participants in the domestic tranche of the offerings. The CMB checks whether there is a contradiction between the international offering circular and the Turkish prospectus, and whether any material information is included in the international offering circular that is missing from the domestic prospectus. However, the CMB does not request or review international offering circulars in offerings of bonds issued by a Turkish issuer.
According to Decree Law No. 32, Turkish residents are free to conduct cross-border securities transactions (in the primary or secondary market) provided that these transactions are realised through a Turkish intermediary institution; however, these transactions should be realised on a reverse-enquiry basis, which means that foreign investment banks should abstain from conducting any intermediary activity in Turkey, including marketing.