How Should the “Exit Share Price” Be Calculated under TCC Art. 531?

Under Article 531 of the Turkish Commercial Code, in an action seeking dissolution of a joint-stock company for just cause, the court may, instead of dissolving the company, order payment of the true value of the claimant shareholders’ shares as of the date closest to the judgment date and the removal of those persons from the company. For that reason, the nominal share value, the amount of the share within paid-in capital, or the book value of equity shown on the balance sheet cannot alone form the basis for calculating the exit share price. What must be determined is the shares’ counterpart within the company’s true economic value.

The first stage of the calculation is determining the valuation date. Because the Code provides that the share value is to be calculated as of the date closest to the judgment date, it is not sufficient to rely on values as of the filing date or on a balance sheet prepared years earlier. If a material period has elapsed between the expert report and the judgment date, the company’s financial position, assets, liabilities, and operating results must be updated. In that way the calculation approaches as closely as possible the economic reality existing at the judgment date.

At the second stage, the company’s 100% value must be determined. If the company is a going concern, the valuation must not rest solely on liquidation or piecemeal sale prices of assets. Future earnings and cash flows, operating capacity, market position, customer base, licences, operating rights, and other intangible values must also be taken into account. By contrast, if continuation of operations is not feasible or the prospect of liquidation predominates, net asset or liquidation value may carry greater weight.

For going-concern companies, the discounted cash-flow method may be used. Under that method, expected future free cash flows to the company are discounted to present value at a weighted average cost of capital appropriate to the company’s risk. This yields first the company value arising from the company’s operations. As an alternative or complement, market multiples of comparable companies—such as “Company Value/EBITDA” and “Company Value/Net Sales”—may be used. An adjusted net asset value method, bringing balance-sheet assets and liabilities to current economic values, may also be applied. Comparing the results of more than one method, rather than relying on the mechanical outcome of a single method, produces a more reliable assessment.

Company value is not the value belonging directly to the shareholders. To move from the company’s market value to the market value of equity, financial debt and debt-like obligations must be deducted, and cash, cash equivalents, and non-operating assets must be added. Debt-like obligations may include litigation and tax risks, severance-pay liabilities, overdue public debts, financing-type amounts owed to shareholders, and off-balance-sheet obligations. Care must be taken not to deduct a second time trade payables already reflected in the working-capital calculation.

Market Value of Equity = Company Value + Cash + Non-Operating Assets − Financial Debt − Debt-Like Obligations

Exit Share Price = Market Value of Equity × Claimant’s Ownership Percentage

Final Exit Share Price = Calculated Share Value ± Share-Specific Rights and Obligations

Once the market value of equity has been determined, the claimant shareholder’s ownership percentage is applied. For example, if the company’s true equity value is TL 200 million and the claimant’s ownership percentage is 20%, the exit share price is, as a rule, TL 40 million. Nevertheless, if the shares carry dividend, liquidation, voting, or board-representation privileges, the economic effects of those privileges must be assessed separately. Separate claims of the shareholder—such as dividends that have been resolved for distribution but not yet paid—must also be taken into account without double counting.

A minority or marketability discount should not be applied automatically. The transaction under TCC Art. 531 is not a voluntary sale of a minority stake between independent parties. The shareholder is exiting the company by court order for just cause. An unreasoned minority discount may therefore transfer part of the company value to the remaining shareholders and cause the claimant to receive less than true value. Such a discount should be discussed only where the concrete features of the case, the rights attached to the shares, and the valuation standard adopted are clearly justified.

The exit share price under TCC Art. 531 must be calculated not on nominal capital, but on the market value of equity determined as of the date closest to the judgment date. In the expert examination, the income approach, adjusted net asset value, and—where appropriate—the market approach should each be applied; the reasons for selecting the methods, the assumptions used, debt adjustments, privileges, and the weighting among methods must be set out clearly. The market value of equity can be obtained only through a transparent valuation that jointly takes into account the company’s operating integrity, future earning capacity, the current value of its assets, and all real liabilities.