Author: Nezihe Boran
Introduction
Public offerings attracted a great deal of attention from companies and investors in the first quarter of 2021. Beyond any doubt, one of the biggest benefits of public offerings is that it provides liquidity to the company (according to the method[1] to be followed) and is a source of unsecured and non-recourse financing. Aside from this, public offerings of shares ensures the institutionalization of the company offered and, thus, the company becomes independent from a specific individual. The recognition and credibility of the company increases. Considering the benefits of a public offering, it seems that this momentum will continue to increase in the upcoming period. Many products, such as company shares, debt instruments, and warrants may be subject to a public offering. This article refers to the public offering of company shares.[2] Below, the main legislation that the companies will be subject to in initial public offerings in Turkey's capital markets, and the conditions deemed necessary by the Capital Markets Board ("CMB") and the basic principles regarding a public offering process, will be focused on.
1. Public Offering Legislation
The concept of public offering is defined under Article 3/1-f (Abbreviations and Definitions) of Capital Markets Law No. 6362[3] (“CML”) as a general call for the purchase of capital market instruments by any means, and the sale made following this call. Among the CML and secondary legislation, public offerings of companies is essentially based on the CMB’s Communiqué on Shares under serial number VII-128.1 ("Communiqué on Shares") and Communiqué on Prospectus and Issue Document under serial number II-5.1 ("Communiqué on Prospectus”). The aforementioned regulations contain the general principles regarding the public offering of companies, which are generally mentioned below.
The process to be followed, and the documents to be submitted, vary according to the relevant public institution or organization. During the public offering process, the CMB approves the prospectus and ensures that all information regarding the company is included therein. Borsa İstanbul A.Ş. ("BIST") ensures to establish whether or not the company is a functioning enterprise. As Merkezi Kayıt Kuruluşu A.Ş. (Central Registry Agency) (“CRA”) will monitor the owners of companies’ shares and their transfers, and it requests the documents that will provide this. Since the public disclosure platform (“PDP”) will establish communication between the company and the investors, the relevant records must be submitted.
2. Conditions Regarding Public Offerings
The first public offering of the shares of non-public partnerships is regulated under the Communiqué on Shares. As per Article 5 (Prerequisite Conditions to Be Applied Before Initial Public Offering of Shares of Nonpublic Corporations) of the Communiqué on Shares, the first condition is that the current capital is fully paid. Among others, one further condition regarding the financial statements of the companies whose shares will be offered to the public for the first time is further stated under the aforementioned provision. Accordingly, pursuant to the most recent financial statements to be included in the prospectuses of corporations, the ratio of noncommercial receivables from related parties, to the total sum of all receivables, may not exceed twenty percent, or their ratio to net assets may not exceed ten percent. In addition, the Communiqué on Shares obliges[4] the authorized institutions that intermediate the sale that is to be undertaken, based on the total price of the shares to be offered to the public.
According to Article 6 (Public Offering of Existing Shares of Shareholders of Non-public Corporations) of the Communiqué on Shares, the shares to be offered to the public must be free from any encumbrance. In other words, there should be no pledges on the shares or any record that restricts the transfer, circulation, or prevents the shareholder from exercising his rights.
3. Public Offering Process
Firstly, taking into account the structure of the company, the company whose shares will be offered to the public should consider whether a public offering is suitable with internal study groups, as well as the intermediary institution to work with. There are many factors that need to be evaluated at this stage. For example, it would be advantageous to be a well-known company, the effect of local and foreign investors on the relevant sector should be analyzed and, especially, the share prices of similar companies traded in the BIST are examined.
If the company decides to offer its shares to the public, the first thing to do is to change the company's articles of association. The articles of association of the partnership to be offered to the public must be in line with the capital markets legislation.
As per Article 6 of the Communiqué on Shares, the articles of association amended in line with the legislation must be submitted to the CMB, together with the documents listed in Annex 1 (Documents Requested to Amend the Articles of Association for Initial Public Offering) of the Communiqué on Shares. Upon the approval of the CMB, the amendment draft must be approved in the general assembly of the partnership within six months. At the end of this period, the approval of the CMB on the draft becomes invalid.
After the amendment of the articles of association in accordance with the legislation as explained, the stage of preparing the prospectus would start. At this stage, a prospectus prepared in accordance with the provisions of the Communiqué on Prospectus and the documents listed in Annex 2 (Documents Required for the Approval of the Prospectus for the Public Offering of the Existing Shares of the Partnerships) thereof are submitted to the CMB.
It is stipulated under Article 17 (Validity Time of Prospectus) of the Communiqué on Prospectus that the prospectus shall be valid for all issues to be realized within twelve months following the date of first publication thereof. The mentioned period is subject to the condition of keeping the document up-to-date. As per Article 19 (Application Processes) of the Communiqué on Prospectus, in the first public offerings, the CMB must reach a decision within twenty business days from the application for approval of the prospectus. According to Article 22 (Approval and Delivery of Prospectus and Issue Document), if the application is rejected as a result of the examination made by the CMB, the relevant rejection decision is notified in writing, together with a justification.
It is stated under Article 28 (Registration and Publication of Prospectus, and Publication of Issue Document) of the Communiqué on Prospectus that within five business days from the application made to the CMB, the applicant is announced on the website of the partnership, if there is a PDP membership than on the PDP and, if any, on the website of the authorized institution. If the CMB approves, then the prospectus received within twenty days is announced again in the subsequent fifteen days, as approved, through the above-mentioned channels. If it is announced on the PDP, the validity period of the approved prospectus starts from this date or, if it is not announced on the PDP, then from the date it is announced on the website of the applicant.
Finally, as per Article 30 (Notification to the CMB) of the Communiqué on Prospectus information of the Turkish Trade Registry Gazette, where the announcement relating to registration of the place of publication of the prospectus by the issuer or the public offeror is published shall be sent in writing to the CMB within six business days following the date of publication.
Conclusion
Public offerings, which are the most preferred financing source by companies in 2021, starts with the public offering decision to be made upon the evaluation of the company whose shares will be offered to the public. Certain conditions are sought in the capital market legislation regarding the capital, financial structure and shares of the partnership to be offered to the public. The partnership that meets the relevant conditions applies to the CMB for the amendment of the articles of association. A prospectus is prepared upon the approval of the CMB. The process to be followed, and the documents to be submitted, vary according to the relevant public institution or organization. While the CMB ensures that all information about the company is included in the prospectus, the BIST would seek for a functioning enterprise, the CRA would monitor the exchange of company shares, and the PDP would ensure proper communication between the company and the investors. The documents and records to be submitted are shaped accordingly.
[1] It is necessary to differentiate the benefits expected from a public offering according to the method to be followed when going public. If the company offers its own shares to the public, the funds will come directly to the company. However, a public offering can also take place with the sale of shares by the shareholders. In such a case, the funds come to the account of the shareholder of the relevant company, not to the company, and the shares of the company only change owners.
[2] Companies deemed to have been offered to the public with more than five hundred shareholders are not covered by this Article.
[3] Capital Market Law No. 6362, OG No. 2851330, 12.2012.
[4] That is to say, if the market value of the shares is below twenty million Turkish Liras, the intermediary institution is obliged to purchase all of the unsold shares. For shares with a market value of between twenty million and forty million Turkish Liras, this liability is given for the whole portion up to twenty million and half of the excess portion.
