CMB’s Approach Towards Use Of Target Company Assets To Secure Financing Of Acquisitions

The debate concerning the use of debt pushdown mechanisms in secured financing of listed company acquisitions has been ongoing in Turkey since the late 1990s. With increasing investment by foreign private equity funds, the scope of this debate may become broader, and cover the use of a target company's assets for securing the financing of an acquisition. This structure involves the acquisition of a company ("Target Company") through a special purpose vehicle ("SPV"), whereby the SPV obtains financing for the acquisition of the Target Company's shares, and actually uses the Target Company's assets to secure such financing.

Often, the acquisition in question entails two phases in respect of listed companies: (i) the initial purchase of shares, and (ii) then the purchase of more shares through a tender offer. The buyer normally secures the financing of phase (i) through a pledge over the purchased shares. However, after acquiring the majority of shares in the Target Company following phase (ii), it uses the Target Company's assets as security. As a result, the lenders are provided with sound collateral, while the buyer's assets are not encumbered at all.

The Capital Market Board's ("CMB") approach towards this structure appears to be controversial. Recently, the CMB encountered an unpleasant experience in a deal where a private equity fund backed out due to a lack of financing. According to the public disclosures made by the target company in that deal, a fund that had agreed to purchase the company's shares terminated its share purchase agreement with the sellers on the ground that it had financing related problems caused by economic fluctuations. The CMB's apporach was that such financing related problems would not have occurred had the financing not been secured by the target company's assets. Reportedly, this experience led the CMB to feel that investors who wish to acquire shares in Turkish companies should secure their own financing instead of relying on the target company's assets as collateral. The CMB's reasoning is that the use of the target company's assets to secure the financing of the same company's acquisition puts the minority shareholders in a difficult position.

From a technical point of view, the CMB's jurisdiction over the pledge of a target company's assets is questionable. The CMB's powers and authorities are governed by the Capital Markets Law ("CML") and the Regulation on the CMB's Organization, Authorities and Working...