Squeeze-Out And Sell-Out Rights In Turkish Capital Markets Law

What Are Squeeze-out and Sell-Out Rights?

Squeeze-out and sell-out rights are mechanisms developed to address the need for the fair termination of the relationship between controlling shareholders and minority shareholders in publicly held companies. These rights were introduced into our legislation for the first time for publicly held companies with the Capital Markets Law No. 6362 (“Law”), which entered into force in 2012.

The procedures and principles governing the exercise of these rights, the legal framework of which is set out in Article 27 of the Law, are regulated by the Communiqué on Squeeze-Out and Sell-Out Rights (II-27.3) (“Communiqué”) issued by the Capital Markets Board (“CMB”).

Squeeze-Out Right: Refers to the redemption of all minority shares and the issuance of new shares, upon the application of the controlling shareholder who has reached a decisive majority in the company, without requiring the consent of the shareholders, in return for a fair price.

Sell-Out Right: This right has been established to balance minority shareholder rights against the controlling shareholder’s squeeze-out right. Accordingly, if one or more shareholders acting in concert reach a decisive majority, minority shareholders are entitled to sell their shares directly to the controlling shareholder. The sell-out right can only be exercised by selling all of the shares held at once.

Why Are These Rights Needed?

In capital companies, the decision-making mechanism is, as a rule, based on the majority principle, and decisions taken accordingly bind all shareholders, regardless of whether they participated in or approved the decision.

In companies where one or more controlling shareholders hold a significant portion of the shares, the decisions of the majority do not, by their nature, always align with the interests of minority shareholders.

Although various protective mechanisms in our legislation, such as the right to obtain information and the right to call a general meeting, have been provided in favor of minority shareholders, these do not always ensure sufficient protection in capital structures with a controlling shareholder.

This article contains general explanations regarding squeeze-out and sell-out rights within the framework of the Law and secondary legislation, including the conditions for the emergence of these rights, the procedures to be followed, and their legal consequences.

When Do These Rights Arise? What Are the Required Conditions?

The basic threshold required under the Communiqué for the exercise of squeeze-out and sell-out rights is that one or more shareholders acting in concert directly or indirectly hold 98% of the voting rights in the company.

The conditions required for the right to arise are as follows:

• One or more shareholders acting in concert must hold, directly or indirectly, 98% of the voting rights in the company.
• In calculating this ratio, voting privileges are not taken into account; instead, the proportion of the total nominal value of the shares held to the company’s share capital is considered.
• Two years must have passed since the date on which the company’s shares were first traded on the stock exchange. It is not possible for the squeeze-out and sell-out rights to be triggered within two years from the initial trading date.

Exception:

• Sell-out and squeeze-out rights do not apply to shares held by public institutions or organizations, unless they decide otherwise.

What Are the Public Disclosure Obligations?

A shareholder who acquires controlling shareholder status by reaching the 98% shareholding threshold must disclose this fact on the Public Disclosure Platform (“KAP”) in accordance with the regulations on special disclosures.

The steps to be followed at this stage are:

• As soon as the controlling shareholder reaches the 98% threshold, a public disclosure must be made on the KAP.
• Following this disclosure, the company is obliged to publicly announce, within thirty days, a valuation report on the share values and a summary of this report.
• The date on which the summary of the report is published is taken as the starting point of the sixty-day limitation period applicable to the sell-out right.

How Is the Sell-Out Right Exercised?

Shareholders wishing to exercise the sell-out right must notify the company in writing within the sixty-day period, expressing their intention to do so.

The process operates as follows:

1. The shareholder submits a written notice to the company within the sixty-day period.
2. Within two business days of the notification, the company confirms that the person is a shareholder and informs the controlling shareholder.
3. Following the company’s notification, the controlling shareholder deposits the share transfer price determined in the valuation report into the company’s account within two business days.
4. On the business day following the deposit of the payment, the amount is paid to the shareholder exercising the sell-out right, and the transfer procedures are completed on the same day.

How Is the Squeeze-Out Right Exercised?

The controlling shareholder may exercise the squeeze-out right at their discretion upon the expiry of the sixty-day period following the publication date of the summary of the report on the value of the company’s shares.

A. Application to the Company

• When the controlling shareholder wishes to exercise the squeeze-out right, they must apply to the company within three business days.
• In order to demonstrate that the amounts payable to the other shareholders can be covered, the controlling shareholder must either provide a bank guarantee letter for the relevant amount or submit documents proving that the necessary cash has been blocked in an account to the company.

B. Board Resolution and Applications to the CMB and Borsa İstanbul

• The company’s board of directors must resolve, within five business days following the controlling shareholder’s application, on the redemption of the relevant shares and the issuance of new shares to be delivered to the controlling shareholder.
• Within ten business days following this resolution: (i) an application must be made to the Capital Markets Board (“CMB”) for approval of the issuance certificate, and (ii) an application must be made to Borsa İstanbul for the delisting of the shares from the stock exchange.
• Within three business days following the CMB’s approval of the issuance certificate, the controlling shareholder must deposit the relevant amount into a bank account opened in the name of the company.

C. Payment and Registration

• After receiving the relevant amount, the company must apply to the Central Securities Depository of Türkiye Inc. (“MKK”) within one business day.
• The MKK transfers the relevant funds to investment institutions so that payments can be made to the entitled shareholders.
• Upon the registration of the issuance certificate approved by the CMB with the relevant trade registry office, the minority shareholders’ shares are deemed to have been cancelled.
• Shareholders who, for any reason, have not received the share price by this date become creditors of the company from that date onward and may claim payment of the relevant amount from the company.

Conclusion

The squeeze-out and sell-out rights regulated under Article 27 of the Law No. 6362, introduced to ensure a balance of interests between controlling and minority shareholders in publicly held companies, play a critical role in establishing this equilibrium.

These rights are essentially based on two different mechanisms: the squeeze-out right allows a controlling shareholder who has reached 98% of the voting rights to redeem minority shares at a fair price without requiring their consent, while the sell-out right grants minority shareholders the opportunity to convert their shares into cash at a fair value.

The exercise of these rights is subject to strict procedural and time requirements set out in detail in the Communiqué. The process begins with the disclosure obligations triggered when the controlling shareholder reaches the 98% threshold and continues with the publication of the valuation report and its summary, as well as the running of the sixty-day limitation period for the sell-out right.

As for the squeeze-out right, it is structured as a sequence of steps, including the controlling shareholder’s application to the company, the board of directors’ resolution, applications to the CMB and Borsa İstanbul, and the payment of share consideration through the Central Securities Depository (MKK). The squeeze-out right produces its legal effect upon the redemption of shares and the registration of the issuance of new shares with the trade registry.

Questions and Answers

What threshold must be reached for the squeeze-out and sell-out rights to be exercised?

One or more shareholders acting alone or in concert must directly or indirectly hold 98% of the voting rights in the company. In calculating this ratio, privileged voting rights are not taken into account; instead, the ratio of the total nominal value of the shares held to the company’s share capital is used.

When are these rights not applicable?

These rights cannot be exercised before two years have passed since the date on which the company’s shares were first traded on the stock exchange. In addition, shares owned by public institutions or organizations are exempt from these rights unless a decision is made to the contrary.

What is the application period for the sell-out right?

Minority shareholders wishing to exercise the sell-out right must apply in writing to the company within sixty days from the date the summary of the valuation report is published on the KAP. If this limitation period is missed, the sell-out right cannot be exercised.

When and how can the squeeze-out right be exercised?

The squeeze-out right may be exercised at the discretion of the controlling shareholder following the expiry of the sixty-day period from the publication of the summary of the valuation report. If the controlling shareholder chooses to exercise this right, they must apply to the company within three business days and provide either a bank guarantee letter or documentation proving that a cash block has been placed.

When are minority shareholders’ shares cancelled?

With the registration of the issuance certificate approved by the CMB with the relevant trade registry office, the minority shareholders’ shares are deemed to have been cancelled. Shareholders who have not received the share price by this date become creditors of the company.

Must the sell-out right be exercised for all shares?

Yes. The sell-out right can only be exercised by selling all shares held at once; partial sales are not permitted under this right.