How can a joint-stock company acquire its own shares?

Acquisition of Own Shares by a Joint Stock Company:

Basic Limits of Acquisition and General Assembly Authority

In joint-stock companies, the principle of capital protection is a fundamental principle of commercial law that guarantees the rights of creditors and the financial stability of the company. The acquisition (repurchase) of a company's own shares, which was previously subject to much stricter restrictions, has been liberalized within certain limits in accordance with the modern understanding of company law under the Turkish Commercial Code No. 6102 (TTK). However, this liberalization cannot be used in any way as a means of arbitrary capital reduction or disguised profit distribution.

I. General Limits of Acquisition

A company's ability to acquire its own shares primarily depends on its financial strength being sufficient for this transaction. According to Article 379 of the Turkish Commercial Code, the following fundamental limits must not be exceeded for a company to be able to acquire its own shares:

Capital and Reserve Limit: The total par value of shares to be acquired cannot exceed ten percent (10%) of the company's issued capital. This limit is a safeguard designed to prevent significant changes in the company's capital structure and the concentration of control in management.
Capital Protection: For a company to be able to acquire its own shares, the net assets resulting from this transaction must not be less than the sum of its capital and legally mandated reserves. If the repurchase transaction exposes the company to the risk of insolvency, it is considered illegal.
Nature of Acquisition: The company must have fully paid for the shares it will acquire. Acquisition of shares for which the price has not been fully paid is prohibited as it carries the risk of burdening the company with debt and invalidating its capital commitment.

II. The Authorizing Role of the General Assembly

The board of directors has the authority to acquire its own shares; however, this authority is not unlimited. The board of directors must obtain prior approval from the general assembly before undertaking this transaction.

Authorization Document: When the general assembly authorizes the board of directors to acquire shares, it must specify certain parameters. These parameters include the total nominal value of the shares to be acquired, the price range (lowest and highest price) at which the repurchase transaction will be carried out, and the duration of this authorization.
Term of Authority: This authority granted by the general assembly cannot be used for an unlimited period. According to the law, the term of authority granted to the board of directors by the general assembly a maximum of five years . At the end of this period, the authority must be renewed. The time limit prevents the board of directors from repurchasing shares based on previous authorizations, even if market conditions have changed.

III. Exceptional Circumstances Where the General Assembly Lacks Authority

There are also limited circumstances in which the board of directors can acquire shares without needing authorization from the general assembly:

Acquisition of Shares Without Consideration: If a company acquires its shares without consideration (for example, through inheritance or donation), authorization from the general assembly is not required. This is because this transaction does not result in a decrease in the company's assets.
Court Decisions: In the process of structural changes in a company, such as mergers, divisions, or transformations, if the acquisition of shares is required within the scope of the withdrawal rights granted to shareholders, this is a legal obligation and is not subject to a general assembly resolution.
Restricted Processes: Even when company shares need to be acquired as part of a full takeover or merger process, a separate authorization resolution from the general assembly is not required.

IV. Legal Oversight and Transparency

The board of directors is obligated to publicly disclose share acquisitions made under the authority granted by the general assembly in its activity report and on the company's website. This obligation of transparency is vital, particularly in privately held companies, to maintain equity among shareholders. The board of directors cannot acquire shares from a particular shareholder for a "special purpose" and thereby provide them with an advantage; acquisition transactions must take place under fair and transparent market conditions.

V. Legal Consequences of Acquisition

What happens if a company acquires its own shares exceeding the legal limit (10% limit) or without the authorization of the general assembly? In this case, the illegally acquired shares must be "immediately disposed of" by the company. If the company does not dispose of these shares, they must be redeemed in accordance with capital reduction rules. Illegal acquisitions not only give rise to the legal liability of the board members but can also be subject to an invalidation lawsuit under the principles of capital protection.

In summary, the board of directors' authority to acquire shares is a flexible tool at the disposal of company management; however, this tool is limited by the oversight of the general assembly and the financial limits set by law. When exercising this authority, the board of directors is obligated to act like a "prudent businessman," considering the company's future financial obligations and shareholder structure.

Financing the Acquisition with "Free Reserves"

The process of repurchasing one's own shares in a joint-stock company is not only a legal procedure but also a process requiring strict financial discipline. The financing needed for the company to repurchase its own shares must come from the most solid portion of its equity. The Turkish Commercial Code (TTK) adopts the principle of capital protection as an absolute rule in this process and mandates that acquisition transactions be carried out using "free reserves." This rule aims to protect the company's creditors and maintain a balance of fairness among shareholders.

I. Source of Financing: Free Reserves

If the cost of acquiring the shares comes from the company's assets, it means a decrease in the company's net assets. If this cost were covered from capital, the company's security against creditors (capital) would erode. Therefore, the legislator has only permitted the company to use resources that it can distribute as dividends.

What are Free Reserves? Apart from general statutory reserves and reserves set aside by the articles of association, these are reserves decided upon by the general assembly and held by the general assembly, and there is no legal impediment to distributing them as dividends. While the company could distribute these funds to shareholders in cash, it uses them to repurchase its own shares.
Financial Limit: The total cost of the shares to be acquired cannot exceed the company's available reserves. If the company's profitability is insufficient and the amount of free reserves does not cover the repurchase cost, the board of directors cannot proceed with the repurchase.

II. Borrowing Ban and Capital Refund

It is strictly prohibited for a company to borrow money to repurchase its own shares. In other words, a company cannot acquire its own shares using borrowed funds obtained through bank loans or by issuing bonds.

Why is it prohibited? A company borrowing to repurchase shares is essentially a form of "capital reduction through borrowing." This jeopardizes creditors' claims. Creditors provide loans to the company as security for capital. If the company uses the loan to repurchase its own shares (i.e., to return capital to shareholders), the creditors' "security" is destroyed through company borrowing.
Concealed Profit Distribution: If a company attempts to acquire shares by borrowing despite lacking sufficient financial strength, this is considered "concealed profit distribution" under the law. This not only undermines the company's financial structure but also lays the groundwork for illegal profit distribution crimes or liability for damages.

III. The Importance of Financial Statements and Auditing

Whether the acquisition transaction is financed from free reserves is determined according to the company's approved financial statements.

Board of Directors' Responsibility: Board members are obligated to base their acquisition transactions on the company's financial statements. If the financial statements do not reflect the truth, or if the available reserves are insufficient at the time of acquisition, the board members shall be personally and jointly liable for this transaction.
Auditor's Role: When authorization for share acquisition is granted at the company's general assembly, the auditors' reports must clearly state whether the company's free reserves are sufficient for this transaction. This is the most important control mechanism enabling shareholders to make informed decisions.

IV. Valuation of Acquired Shares

How is the “price” of shares to be acquired determined? When using free reserves, the price of the shares to be repurchased must be close to their market value (or comparable value). A company cannot distribute a hidden dividend to shareholders by repurchasing its own shares at a price far above their normal value (e.g., a 100% premium). If the acquisition price is higher than the market value, the difference is considered “unjust enrichment” and, according to the principles of capital protection, gives rise to liability for the board of directors.

V. The Legal Meaning of Financial Discipline

The use of free reserves underscores that share ownership in a joint-stock company is not merely a "capital investment," but has an organic link to the company's equity structure. A company's repurchase of its own shares should be considered an "investment decision"; the company should act as if it were purchasing shares from the external market. If a company cannot repurchase its shares because it lacks accumulated profits (reserves), the transaction is considered financially unfeasible.

Companies acquiring their own shares through borrowing or capital erosion constitutes an abuse of the "limited liability" shield offered by corporate law. Therefore, the requirement for free reserves is not only a financial restriction but also a "prudence" rule that ensures the going concern of the company.

Status of Acquired Shares and Suspension of Voting Rights

While the shares acquired by a joint-stock company become the property of the company, these shares must have a "special legal status" that distinguishes them from other shares. The exercise of rights arising from these shares while the company holds them may conflict with the fundamental principles of company law. Therefore, the Turkish Commercial Code (TTK) has adopted the principle of "suspending" or completely "rendering unusable" the shares acquired by the company. This regulation eliminates the risk of the company governing itself or influencing its own decisions (self-control problem).

I. Suspension of Voting Rights

The most critical limitation on the shares acquired by the company is the inability to exercise the voting rights arising from these shares.

Preventing Self-Control: If a company could vote at the general assembly solely through its shareholdings, this would result in "self-government." The board of directors could manipulate the majority at the general assembly with these shares, secure favorable outcomes for itself in ratification processes, or impose its will in board elections.
Legal Consequence: Voting rights arising from acquired shares are suspended for as long as the company holds them. These shares are also not taken into account in the "quorum" of the general assembly. In other words, these shares held by the company are excluded from the calculation as if they did not exist at all. This rule prevents the board of directors from establishing artificial dominance over the general assembly.

II. Status of Other Financial Rights

Unlike voting rights, the status of other rights represented by shares is regulated in a way that affects the company's financial structure.

Dividend Rights: When a company acquires its own shares, the dividends due on these shares represent a "self-payment" by the company, which is financially meaningless. Therefore, the company does not have a dividend right on its own shares. The company cannot demand dividends on its own shares; the dividends due on these shares are distributed to other shareholders or added to free reserves.
Pre-emptive Rights: When a capital increase occurs, the pre-emptive right cannot be exercised for the company's own shares. In other words, the company cannot exercise its right to acquire a share of the increased capital in proportion to its existing holdings. These shares are excluded from the capital increase.
Liquidation Share: The same principle applies in the event of company liquidation. No liquidation share is paid for the company's own shares; any remaining assets are distributed among the other shareholders.

III. Legal Nature of Shares: "Dead Shares"

In practice, these shares held by the company are often referred to as "luxury shares" or "suspended shares." The shares have not been lost, but they remain "dormant" while held by the company. The moment the company transfers these shares to a third party, they "come back to life" and become exercisable with all their rights (voting rights, dividend rights, etc.).

This situation indicates that the shares are temporarily held "in trust" within the company. These shares, which are part of the company's assets, are shown as a "deduction item" within "equity" on the balance sheet. In other words, by acquiring these shares, the company actually reduces its own capital (in economic terms).

IV. Responsibility of the Board of Directors

The board of directors must be aware that they cannot "exercise" the rights associated with these shares held by the company. If the company management includes the shares it holds in the voting at the general assembly, or makes an unfair payment to itself from the company's treasury (such as a dividend) based on these shares, this action will be considered "illegal".

Annulment Lawsuit: A general assembly resolution passed using the voting rights of the company's shareholders is a resolution that can be annulled "on grounds of its content." Shareholders can request the court to annul the general assembly resolution, claiming that these votes influenced the outcome.
Security: The suspension of shares is also a great safeguard for minority shareholders. It prevents the balance of power in the general assembly from shifting in favor of the board of directors due to the company's repurchased shares.

V. Transparency and Reporting

The amount of shares held by the company must be clearly stated in the annual activity report prepared each year. The company is obliged to disclose how many shares it repurchased, at what price, and under what legal status these shares are held. This information is critical data for investors analyzing the company's financial situation and equity changes.

In short, a company acquiring its own shares doesn't mean making them "part of the company," but rather rendering them "unusable" for a specific period and withdrawing them from the market. This is similar to a "quarantine" period achieved by suspending shareholder rights. The company may own its own shares, but it cannot exercise its "own shareholder rights.".

Exceptional Circumstances and Special Situations for Acquisition

There are certain special circumstances where the general rules applied to the acquisition of shares by joint-stock companies (ten percent limit, general assembly authorization, use of free reserves) are relaxed or completely waived. The legislator, taking into account the necessities of commercial life, company mergers, and structural changes, has regulated these exceptional cases in Articles 380 and 382 of the Turkish Commercial Code. These exceptions are situations where the acquisition of shares serves broader "strategic" or "essential" objectives beyond the purpose of protecting the company's capital.

I. Structural Changes and Judicial Decisions

During structural changes such as mergers, divisions, or transformations of a company, it may be necessary to acquire shares within the scope of the withdrawal rights granted to shareholders.

Right of Withdrawal: Shareholders who oppose a merger or demerger decision are granted the right to transfer their shares to the company for a fair price. In this case, the company is obliged to acquire the shares of those who wish to withdraw from the partnership. Since this is a legal "obligation" and not a "preference," there is no need for prior authorization from the general assembly or adherence to the 10% limit.
Judicial Decisions: If a court decision compels a company to acquire its own shares, this acquisition constitutes a legal obligation. For example, the acquisition of a shareholder's shares by the company as a result of expulsion lawsuits falls within this scope.

II. Acquisitions Without Consideration

In cases where the acquisition is "gratis," there is no cash outflow or use of reserves that would violate the principle of capital preservation. Therefore, these acquisitions are exempt from general rules.

Inheritance and Donations: When company shares are inherited or donated to the company, the company acquires these shares "free of charge." This transaction does not reduce the company's assets; on the contrary, it has an effect that increases the company's assets.
Capital Increase: If a company holds its own shares and a new capital increase occurs, the company may receive bonus shares. This is a technical consequence directly resulting from the increase in shares and is not subject to any restrictions.

III. Full Takeovers and Acquisitions of Affiliated Companies

If one company acquires another company entirely, the acquired company may already hold shares of the acquiring company.

Legal Succession: The acquiring company legally takes over all the assets of the acquired company (and therefore its own shares). In this process, the acquisition of the company's own shares is a technical "succession" (replacement). In this case, the 10% limit or general assembly authorization is not required; because the company has not made an "purchase" transaction, but has assumed the assets of an existing company as a whole.

IV. Distribution of Shares to Company Employees

Joint-stock companies may implement "employee share ownership" programs to motivate their employees or strengthen company loyalty.

Special Status: If stipulated in the articles of association and a share acquisition plan has been established by the general assembly, the company may acquire employee shares from the market. This process is usually carried out under a general authorization resolution of the general assembly or within the framework of a special share acquisition plan. In this case, the acquired shares are permitted to be held for a short period (usually up to 2 years) before being transferred to employees. This exception is facilitated because it serves a “social purpose” aimed at enhancing company culture and loyalty.

V. Condition of Being Excluded from Legal Limits

Shares acquired under exceptional circumstances are not taken into account when calculating the general 10% limit. However, the company cannot hold these shares "forever".

Disposal Obligation: Shares acquired, particularly due to mergers, demergers, or separation rights, must be disposed of or redeemed within a reasonable period (usually 2-3 years). If the company holds these shares unnecessarily for an extended period, this is considered a "disguised reduction of capital."
Exceptional Acquisitions: Acquisitions made under exceptional circumstances must be explained in detail by the board of directors in the activity report. The legal grounds for acquiring these shares (right of withdrawal, inheritance, merger, etc.) and the strategy by which they are managed must be reported to shareholders and the public.

Exceptions allow joint-stock companies to maneuver in the face of unexpected situations in commercial life. However, this ability does not give company managers permission to "repurchase shares whenever they want." Only in certain, legally limited "cases of necessity" can the company deviate from general rules. This situation reflects a successful balance in commercial law, simultaneously demonstrating both flexibility and strict oversight principles.

Disposal or Redemption of Acquired Shares

Shares acquired by a joint-stock company cannot remain "dormant" indefinitely in the company's assets. The repurchase of these shares is, as a rule, a temporary measure. Whether the purpose of acquiring the shares is to support market value or as a requirement of a merger process, the final stage is either the disposal of these shares through resale or their redemption through a capital reduction. This process is the most technical stage undertaken to protect the company's equity structure and capital integrity.

I. Disposal (Resale) of Shares

The company can generate cash inflow into its assets by reselling the shares it repurchased. This process is essentially the reverse of economics.

Market Conditions and Pricing: During the disposal of shares, the board of directors acts within the scope of the authority granted by the general assembly at the time of acquisition. The sale must be carried out in accordance with the market value of the shares. The company cannot provide an unfair advantage to third parties by selling its shares below their normal value; otherwise, this would create liability for the board members for "causing damage to the company".
Pre-emptive Rights: Whether a company grants pre-emptive rights to existing shareholders when divesting its own shares depends on the provisions of its articles of association and the strategy pursued by the board of directors. However, these sales are generally carried out through stock exchanges or widely participatory methods to avoid disrupting market order.
Legal Consequence: When shares are sold to third parties, the "suspension" status on these shares is lifted. The shares, along with all their rights (voting rights, dividends, etc.), are transferred to the new owners. As the company's holdings of shares decrease, the "deduction item" on equity in the company's financial statements also disappears.

II. Redemption of Shares (Capital Reduction)

Instead of selling the shares it acquired, the company may choose to "destroy" them. This process is called "redemption" and is legally subject to the capital reduction procedure.

Capital Reduction Procedure: Redemption is not simply a basic accounting entry. Capital reduction is a process that requires amendment of the company's articles of association, special announcements to protect creditors, and mandatory registration. The company deducts the par value of the shares to be redeemed from its registered capital.
Creditor Protection: A capital reduction necessitates a call to creditors because it could pose a risk to them. The company is obligated to prove that it has paid or secured its debts to its creditors. However, since the company is not simultaneously redeeming its own shares (the shares are already in the company's possession) as it is performing a "capital refund," the redemption is seen as less risky for creditors than a general capital reduction.
Redemption Decision: A general assembly decision to reduce capital is required for the redemption process. The board of directors proposes the redemption of shares to the general assembly, and after the general assembly's approval, the registration and publication processes begin.

III. Sanctions for Failure to Dispose of Shares

The law does not permit a company to hold acquired shares indefinitely. The acquired shares must be sold or redeemed within a “reasonable period” (typically 2-3 years for exceptional acquisitions, or a reasonable period in line with company strategy for general acquisitions).

Mandatory Capital Reduction: If the company does not dispose of its shares within the legally mandated or articles of association periods, it is obligated to redeem these shares (capital reduction). If the board of directors fails to fulfill this obligation, there is a risk of artificial inflation and capital loss in the company's equity.
Administrative and Criminal Liability: Neglecting processes constitutes a failure of board members to fulfill their duties, which can result in both compensation claims and administrative sanctions.

IV. Accounting and Reporting

Redeemed shares are deducted from the "capital" item on the company's balance sheet. This transaction reduces the company's paid-in capital.

Transparency: Disposal or redemption transactions should be detailed in the following year's annual report. Investors should clearly see how the company is managing its holdings of its shares – whether it is generating liquidity by selling these shares or reducing its capital through redemption. This transparency is essential for the continuity of shareholder ownership and market confidence.

V. Final: The Restructuring of Capital

The fate of acquired shares actually determines the company's future strategic direction. A sale represents the company's search for new resources in the market and its confidence in the share value, while redemption symbolizes the company's desire to continue with a smaller but more robust capital structure.

The process of a joint-stock company repurchasing its own shares and subsequently liquidating them through appropriate methods is one of the most refined processes offered by corporate law. This process allows for both adherence to the principle of capital preservation and the implementation of the flexible financial maneuvers the company needs.

acquisition in good faith, Turkish Commercial Code

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