INTRODUCTION
The principle of free transferability of shares is fundamental in joint stock companies. Under this principle, both uncertificated shares and shares represented by certificates may be freely transferred to others without the approval of any corporate body, the shareholders or third parties. Transferability allows shareholders to exit the company easily and to realise the value of their shares by selling them. Moreover, it is thanks to this principle that the element of “anonymity” acquires its meaning and content.[1] Nevertheless, this principle of free transferability recognised in Turkish commercial law brings certain drawbacks in some cases. Anticipating these potential drawbacks, the legislator has introduced certain restrictions on the principle of free transferability. Beyond this, the flexibility of the restrictions provided for in the Turkish Commercial Code No. 6102 (the “TCC”) does not sufficiently meet the needs of the shareholders of some joint stock companies. In practice, to achieve the flexibility they desire, shareholders sign shareholders’ agreements (also referred to as partnership agreements, Shareholders Agreement, SHA). This article first addresses the share transfer restrictions available under the TCC, and then discusses the rationale for shareholders’ agreements and certain provisions included in them that restrict share transfers.
I. Transfer Restrictions
The exceptions to the principle of free transferability regulated in the TCC arise either directly from the TCC (the law) or from the articles of association of the joint stock company. For this reason, they are referred to, respectively, as “Statutory Restrictions” and “Restrictions under the Articles of Association”.
A. Statutory Restrictions:
The statutory restriction regulated in Article 491 of the TCC serves the purpose, to which the legislator attaches great importance, of protecting the capital of the joint stock company. Under the statutory restriction, registered shares that have not been fully paid up may only be transferred with the approval of the company. At this point, it is worth recalling that, under Article 484 of the TCC, bearer share certificates cannot be issued for shares that have not been fully paid up. The statutory restriction essentially aims to prevent persons without the ability to pay from becoming shareholders and thereby to protect the company’s capital. In line with this purpose, Article 491/2 of the TCC provides that the company may refuse to approve such a transfer only if the transferee’s ability to fulfil the obligation to pay the outstanding capital is doubtful and the transferee has not provided the security requested by the company. Thus, if the transferee is solvent or has provided the necessary security for the outstanding capital contribution, the company is obliged to approve the transfer. The body that grants approval is the board of directors, which is the body authorised to represent the joint stock company. There is no doubt that the statutory restriction does not apply to fully paid-up registered shares.
Another point to bear in mind is that in certain cases, even if registered shares have not been fully paid up, the company’s approval is not required for the transfer. Indeed, under Article 491 of the TCC, the company’s approval is not required where the transfer takes place through inheritance, division of an estate, the matrimonial property regime or compulsory enforcement. It should be noted, however, that in these cases too, under Article 493/4 of the TCC, the company may prevent the transfer by offering to take over the shares at their real value.
B. Restrictions under the Articles of Association:
1. In General:
Restrictions under the articles of association are a means of restricting share transfers which generally gain importance in joint stock companies where the composition of the shareholder base is a sensitive matter. Through such restrictions, the transfer of registered shares may be restricted in the company’s articles of association. Unless the articles of association contain such a restriction, registered shares may be freely transferred. Where the articles of association contain a valid provision restricting the transfer of registered shares, the approval of the joint stock company is required for the transfer, even if the registered shares have been fully paid up. Share certificates whose transfer is restricted under the articles of association are referred to as “restricted registered share certificates”.
Restrictions under the articles of association may be introduced at incorporation, or may subsequently be added to the articles of association, under Article 421/3-c of the TCC, by the affirmative vote of shareholders or their representatives holding at least seventy-five percent of the capital. If this quorum is not reached at the first meeting, the same quorum is required at subsequent meetings. It should be noted at the outset that restrictions under the articles of association may apply to uncertificated shares, registered share certificates and interim certificates, but not to bearer shares, since holders of bearer share certificates are considered to have an absolute vested right to transfer such certificates freely.[2]
By providing that the articles of association may stipulate that registered shares may only be transferred with the company’s approval, Article 492 of the TCC introduces a general rule, but it does not regulate the grounds for refusing approval or the consequences thereof. These matters are regulated in the following articles according to whether or not the shares are listed on a stock exchange. In other words, the transfer of registered shares of companies whose shares are not traded on a stock exchange and of companies whose shares are traded on a stock exchange is subject to different provisions. Only unlisted registered shares will be addressed here.
With respect to unlisted registered shares, Article 493/1 of the TCC provides that the joint stock company may refuse a request for approval by invoking an important reason set out in the articles of association, or by offering the transferor to acquire the shares, for its own account or for the account of other shareholders or third parties, at their real value at the time of the request.
2. Refusal for an Important Reason in respect of Unlisted Shares:
In the transfer of unlisted registered shares, as a first option, the company may refuse to approve the transfer by invoking an important reason set out in the articles of association (Article 493/1 TCC). Provisions of the articles of association concerning the composition of the shareholder base constitute an important reason if they justify refusal of approval with regard to the company’s business purpose or the economic independence of the enterprise (Article 493/3 TCC). It is noteworthy that the statute does not set out the important reasons exhaustively. However, although the important reasons are not listed exhaustively, the criteria for determining whether they comply with the TCC are limited. Restrictions that do not comply with the TCC should be considered invalid. Not every reason desired by the shareholders can be included in the articles of association as an “important reason”. According to the provision, an important reason exists where provisions of the articles of association concerning the composition of the shareholder base (composition du cercle des actionnaires, Zusammensetzung des Aktionärskreises) justify refusing approval of the share transfer with regard to the company’s purpose and the independence of the enterprise. Furthermore, when establishing a restriction rule in the articles of association, merely referring to Article 493 of the TCC is not sufficient; the important reason must also be specified in a manner consistent with the justified reasons set out in the law.[3] By way of example, provisions making transfers to competitors of the company subject to the company’s approval constitute a valid important reason. Likewise, provisions stipulating that shares may not be transferred without approval to persons not operating in a particular sector are also accepted as constituting an important reason. On the other hand, whether, for example, membership of the shareholders in the same family constitutes an important reason is debated in legal doctrine.
3. The Escape Clause
In addition to the important reasons set out in the articles of association, the company has the right in other cases as well to refuse to approve a share transfer and thus to refuse the request of the prospective transferee to be entered in the share register. The first of these cases, under Article 493/1 of the TCC, is where the company refuses the request for approval by offering the transferor to acquire the shares, for its own account or for the account of other shareholders or third parties, at their real value at the time of the request. The provision reads: “The company may refuse the request for approval by invoking an important reason set out in the articles of association or by offering the transferor to acquire the shares, for its own account or for the account of other shareholders or third parties, at their real value at the time of the request.” Accordingly, no provision in the articles of association is required for the company to use this option.[4] Since under this rule the company may prevent a share transfer even in the absence of an important reason, this concept is referred to in legal doctrine as the escape clause. It should also be noted that, where the company prevents a transfer by means of the escape clause, the conditions for the company’s acquisition of its own shares regulated in Article 379 et seq. of the TCC need not be met. Such an acquisition may be regarded as falling within Article 381 of the TCC or as an additional exception to those provided for in Article 379 et seq. of the TCC.
4. Refusal on Other Grounds:
Apart from the important reasons set out in the articles of association and the escape clause option, another case in which the company may refuse to approve a share transfer is, under Article 493/3 of the TCC, where the transferee does not expressly declare that it is acquiring the shares in its own name and for its own account. This provision was essentially introduced in order to prevent — as far as possible — the circumvention of the restriction provisions set out in the articles of association.
It should also be noted that, in transfers through inheritance, division of an estate, the matrimonial property regime or compulsory enforcement, the company cannot rely on the restriction provisions of the articles of association, but may refuse approval only if it offers the acquirers to purchase their shares at their real value.
5. Cases in which Restrictions under the Articles of Association Cease to Have Effect:
One case in which restrictions under the articles of association cease to have effect is where the company has entered into liquidation (Article 492/3 TCC).
In addition, under Article 421 of the TCC, holders of registered shares who voted against a general assembly resolution, adopted by the affirmative vote of shareholders or their representatives holding at least seventy-five percent of the capital, on the complete change of the business purpose in the articles of association or on the creation of privileged shares, are not bound by restrictions on the transferability of shares for six months from the publication of that resolution in the Turkish Trade Registry Gazette (the “TTRG”) (Article 421/6 TCC). In other words, shareholders who are dissatisfied with these resolutions and voted against them have the right, during this six-month period, to transfer their shares without complying with the restrictions under the articles of association, if any. It should be underlined that this provision relates only to restrictions under the articles of association and cannot override statutory restriction rules.[5]
What should be particularly noted here is that the purpose of this provision is to give a holder of registered shares whose transfer is restricted the opportunity to exit the company by transferring its shares free of any restriction where the company’s business purpose is completely changed and/or privileged shares are created. Such resolutions (a complete change of the business purpose or the creation of privileged shares) bring about significant changes. It would be incompatible with the sense of justice for a shareholder who was unable to prevent the adoption of such resolutions to be, in effect, condemned to remain in the joint stock company because existing restrictions under the articles of association prevent it from transferring its shares.[6] For this reason, the legislator has provided that, in such a case, the restrictions under the articles of association are suspended. Although not expressly stated in the statute, it is apparent that the legislator proceeded on the assumption that a restriction under the articles of association exists on the transfer of registered shares. Therefore, if there is no such restriction, Article 421/6 of the TCC does not apply. It should be underlined that the provision does not grant shareholders who voted against an amendment to the articles of association introducing a new restriction under Article 421/3-c of the TCC a period during which they may transfer their shares free of the restriction. According to some views,[7] dissenting shareholders need this freedom of transfer even more where new restrictions are introduced on the transfer of registered shares than in the cases of a change of business purpose or the creation of privileged shares. On the other hand, the preamble of Article 421 of the TCC shows that the legislator deliberately did not provide for this option. According to the preamble, the reason for not granting dissenting shareholders this freedom of transfer where a restriction provision is introduced into the articles of association is to prevent the benefit expected from the restriction mechanism, which seeks to prevent shares from passing to outsiders, from being rendered ineffective. Indeed, allowing transfers to outsiders for six months, especially given the demanding quorum requirements, could eliminate the benefit expected from the introduction of the restriction.
6. Status of the Rights Attached to the Shares where the Joint Stock Company Refuses Approval:
It is also necessary to address the case where the joint stock company refuses to approve a share transfer under Article 493 of the TCC. First, it should be noted that under Article 494/3 of the TCC, if the company does not reject the request for approval within three months of receiving it, approval is deemed to have been granted. So, where the joint stock company does not approve the transfer, who will hold title to the shares and all the rights attached to them? Article 494/1 of the TCC clarifies this point. According to this article, as long as the approval required for the transfer has not been granted, title to the shares and all rights attached to them remain with the transferor. On the other hand, where the shares are acquired through inheritance, division of an estate, the matrimonial property regime or compulsory enforcement, title to the shares and the related property rights pass to the acquirer immediately, while the rights to attend the general assembly and voting rights pass only upon the approval of the joint stock company (Article 494/2 TCC). It is noteworthy that the legislator has adopted the theory of separation for share transfers through inheritance, division of an estate, the matrimonial property regime or compulsory enforcement. Separation here means the separation of the property rights and the administrative rights attached to the share. In contrast, Article 494/1 adopts the theory of unity rather than the theory of separation. With regard to the transfer of rights attached to shares, there is a departure both from Article 490 of the TCC, which provides that registered shares are transferred by endorsement and the transfer of possession to the transferee, and from the fundamental principles governing negotiable instruments. It may be argued that this departure was made for the sake of the benefits of the theory of unity.
II. Shareholders’ Agreements
A. In General:
A shareholders’ agreement is an innominate, atypical type of contract not regulated by statute. Particularly in joint stock companies that are not publicly held, and especially where there are only a few shareholders, it is to be expected that the relationship among them is closer than, for example, in publicly held companies. Consequently, shareholders enter into shareholders’ agreements in order to strengthen mutual trust and to eliminate at the outset any questions that might arise in the future. Shareholders’ agreements are signed to determine matters such as the exercise of shareholder rights, the operation and management of the company, and the mutual rights and obligations of the parties to the agreement. While this is the general purpose, it can be said that in practice shareholders’ agreements also aim to regulate matters that cannot be included in the articles of association of a joint stock company under the TCC. We have examined above the exceptions that may be introduced to share transfers in joint stock companies under Turkish commercial law. By means of certain special provisions added to shareholders’ agreements, restricting share transfers or making them subject to certain conditions can be achieved more intensively and strictly than the restrictions permitted under the TCC, and a flexibility that would normally be unattainable within the limits of the TCC can be achieved through shareholders’ agreements. Similarly, while under the TCC restrictions can only be valid for registered shares, provisions in a shareholders’ agreement may be stipulated for all types of shares.
B. Certain Provisions Found in Shareholders’ Agreements:
Some customary provisions found in shareholders’ agreements concerning share transfers are set out below.
- Call Option:
A call option is an option that grants the shareholder holding this right under the shareholders’ agreement the right to purchase all or part of the shares of all or some of the other shareholders at a predetermined or determinable price (for example, the method for determining the share price may be specified in advance), and imposes on the person(s) on the other side of this right the obligation to sell their shares. A call option may be preferred in particular to prevent deadlocks that paralyse the company.
- Put Option
A put option, on the other hand, is an option that grants the shareholder holding this right under the shareholders’ agreement the right to sell all or part of its own shares to the other shareholders at a predetermined or determinable price, and imposes on the shareholders on the other side of this right the obligation to purchase those shares at that price.
- Tag-Along Right
This option grants each shareholder holding this right, where a shareholder sells its shares to a third party (the “buyer”), the right to participate in that sale by selling to the buyer a number of shares corresponding to its own shareholding, on terms no less favourable. Through the exercise of this right, the buyer purchases the shares not from a single shareholder but from all the shareholders exercising this right. In most cases, this option benefits minority shareholders who do not want the controlling shareholder to transfer its shares and control of the company to change hands, since this right enables minority shareholders to exit the company in the event of a change of control.
- Drag-Along Right
This option grants the shareholders to whom it is granted, where they sell their shares to third parties, the right to compel the other shareholders to sell their shares as well on terms no less favourable. As a result of the right holder exercising this drag-along right, the other shareholders become obliged to sell their shares to the buyer.
- Pre-emption Right:
A pre-emption right is a formative right exercised by a unilateral declaration of intent. Under a pre-emption right, where a shareholder sells its shares to a third party — in other words, where there is a contract for the sale of the shares (Share Purchase Agreement, SPA) — upon the right holder exercising its right, the right holder becomes the buyer under the sale contract following the declaration of intent. That is, where other shareholders subject to the right transfer their shares by a sale contract, the holder of the pre-emption right, by declaring through a unilateral declaration of intent that it is exercising its right, automatically takes the place of the buyer (transferee) under the share purchase agreement. By its nature, it may also be argued that a pre-emption right is a call right whose exercise is subject to a condition. Since the selling shareholder has already expressed its intent in the sale contract, the sale contract can be completed upon the exercise of the right.
- Right of First Refusal (First Refusal or First Option)
The right of first refusal is a right aimed at preserving the composition of the shareholder base. It means that a shareholder wishing to sell its shares must, before transferring them to third parties — to outsiders, so to speak — offer a sale on terms no less favourable to the holders of the right of first refusal. Here, the shareholder wishing to sell may still transfer its shares to third parties if the holders of the right of first refusal do not wish to purchase them. The obligation of the party subject to the right of first refusal is to first offer the shares for sale to the right holders. Depending on how the right of first refusal is drafted in the shareholders’ agreement, it can be determined whether the offer constitutes an offer or an invitation to treat within the meaning of the law of obligations.
C. Inclusion of the Provisions in the Articles of Association of the Joint Stock Company instead of the Shareholders’ Agreement:
The question may arise as to what would happen if some of the provisions mentioned above were included directly in the articles of association of the joint stock company rather than in the shareholders’ agreement. As is known, Article 480 of the TCC provides that the sole obligation of the shareholders of a joint stock company is to pay the capital they have subscribed (the principle of single obligation). Consequently, some of the rights mentioned above would, if included in the articles of association, breach the principle of single obligation. For example, call and put options are incompatible with Article 480 of the TCC. According to the prevailing view in Switzerland, provisions of the articles of association on rights of first refusal and pre-emption rights are considered valid if they remain within the limits of transfer restrictions, unless they cause the shareholders significant economic loss (for example, by forcing them to sell their shares below their real value).[8] It may be argued that these latter provisions should also be valid under Turkish law. Such provisions (rights of first refusal and pre-emption rights) essentially aim to preserve the composition of the shareholder base. Since the legislator attaches particular importance to this (Article 493 TCC), it would be inappropriate to deny that they may be included in the articles of association.[9] Leaving aside this position on rights of first refusal and pre-emption rights, it can be seen that certain arrangements going beyond the possibilities normally afforded by the TCC provisions on restricting share transfers can only be provided for through a shareholders’ agreement, and a flexibility that normally cannot be achieved through the articles of association of a joint stock company can only be achieved through a shareholders’ agreement. Indeed, it is accepted that rights such as call and put options cannot be included in the articles of association of a joint stock company and, if included, are deemed invalid.
D. Binding Effect of the Shareholders’ Agreement:
There is no doubt that provisions included only in the shareholders’ agreement, and not in the articles of association of the joint stock company, are valid and binding under the law of obligations. A shareholders’ agreement is a contract creating obligations with relative effect, which obliges the shareholders to exercise their shareholder rights in accordance with the shareholders’ agreement. The view accepted in legal doctrine is that a shareholders’ agreement establishes, alongside the joint stock company, a simple partnership among the parties to the shareholders’ agreement.
It should be underlined that the idea of going beyond the scope permitted by the TCC through shareholders’ agreements is based on the fact that the corporate sphere, to which the articles of association of a joint stock company belong, and the sphere of the law of obligations, to which the shareholders’ agreement belongs, rest on different grounds. In other words, these arrangements lie in different legal spheres. Accordingly, regulating in a shareholders’ agreement a matter that cannot be regulated in the articles of association should not be regarded as circumvention of the law (fraude à la loi).
The point to bear in mind is that a shareholders’ agreement creates rights and obligations only for the parties to the agreement. Unlike the articles of association, a shareholders’ agreement does not create rights and obligations vis-à-vis third parties or the joint stock company itself. Consequently, the provisions of the shareholders’ agreement cannot be asserted against the joint stock company or third parties. Furthermore, the competent bodies of the joint stock company cannot be compelled to comply with the shareholders’ agreement. As a result, where one of the parties breaches the shareholders’ agreement, the sanctions applicable to the breaching party are limited to those available under the law of obligations. In other words, a person who has signed a shareholders’ agreement and is a shareholder in a joint stock company may, in the event of a breach of that agreement by another signatory, at most have the right to claim damages, to demand specific performance, or to withdraw from or terminate the agreement. On the other hand, that person will not be able to apply to the joint stock company or, under the TCC, to the commercial court to remedy the breach.
CONCLUSION
The rule in joint stock companies is the principle of free transferability of shares. However, restrictions on the free transferability of shares may be introduced through certain provisions arising from the law (the TCC), the articles of association of the joint stock company or a shareholders’ agreement. The first of these is referred to as a statutory restriction. The statutory restriction applies to registered share certificates that have not been fully paid up and aims to protect the capital of the joint stock company. Restrictions under the articles of association, in turn, essentially make it possible to prevent a share transfer on the basis of important reasons set out in the articles of association or through the company’s use of the escape clause. In practice, shareholders’ agreements are signed by shareholders who wish to subject share transfers to stricter rules or to go beyond the scope permitted by the TCC with respect to share transfers. Unlike restrictions under the articles of association, although shareholders’ agreements allow for a more flexible structure, they have relative effect and can only be asserted between the parties to the agreement.
[1] Tekinalp, Ünal, 2012, Anonim Ortaklıkta Yeni Bağlam Sisteminin Esasları – Pay Defteri Hukuku ile, İstanbul: 1-01.
[2] Karasu, Rauf, 2008, Türk Ticaret Kanunu Tasarısına Göre Nama Yazılı Payların Devrinin Sınırlandırılması, GÜHFD 2008, Vol. XII, No. 1-2, p. 130.
[3] See the preamble to Article 493 TCC.
[4] See the preamble to Article 493 TCC.
[5] See the preamble to Article 421 TCC.
[6] This right granted to shareholders in the event of a change of business purpose or the creation of privileged shares may be compared with, respectively, the right of exit and the mandatory share purchase offer that were granted, under Article 23 of the Capital Markets Law No. 6362 (the “CML”) as in force before the amendments introduced by Law No. 7222, to shareholders who attended general assembly meetings on significant transactions such as “changing the field of activity entirely or to a significant extent” and “providing for privileges or changing the scope or subject of existing privileges”, voted against and had their dissent recorded in the minutes of the meeting. Naturally, while the pre-amendment text of the CML, which attaches importance to investors’ interests, granted such shareholders the right to sell their shares directly to the company or (in the case of privileges) imposed an obligation to make an offer to purchase those shares, Article 421/6 of the TCC merely suspends the restrictions under the articles of association.
[7] Çamoğlu (Poroy/Tekinalp), 2014, Ortaklıklar, İstanbul: N. 707d.
[8] Tekinalp (Poroy/Çamoğlu), 2014, Ortaklıklar, İstanbul: N. 859.
[9] Tekinalp, Ünal, 2012, Anonim Ortaklıklarda Yeni Bağlam Sisteminin Esasları, İstanbul: N. 09-10.