Call Option On Shares Of Joint Stock Company
Table of Contents
1. INTRODUCTION – Call Option
One of the most common structures within the framework of the joint venture agreements and the shareholders’ agreements is the call and put options. These option rights may be regulated within the shareholders’ agreement, as well as agreements that include only option rights. The call option, which is one of the option rights mentioned above and is referred to as “call option” in American law, is generally defined as the right of the right holder to buy the shares from the right debtor at any time or upon the fulfilment of certain conditions depending on the terms of the agreement with a unilateral declaration of will.
2. LEGAL CHARACTERISTIC OF THE CALL OPTION
The call option is characterized as a relative formative right in the doctrine, since the agreement between the shareholder and the holder of the call option, which includes the transfer of the shares to the holder of the call option, is established upon the exercise of the call option by the holder of the call option with a unilateral declaration of will. In addition, the parties may determine various mechanisms within the framework of the option agreement, such as the exercise of the call option by the right holder within a certain period or call option arises only upon the fulfilment of certain conditions. As a matter of fact, in cases where the call option is fixed to a certain period in the option agreement, the right is forfeited if the right is not exercised within the specified period, or the right holder has the opportunity to exercise the call option if the conditions specified in the option agreement are met. The point to be noted here is that the birth of the call option, rather than its exercise, is subject to certain conditions. Therefore, the principle of non-contingency of formative rights is not violated.
3. VIOLATION OF CALL OPTION BY THE SHAREHOLDER
As mentioned above, since the call option is a relative right that has effect only between the parties, in the event that the shares are transferred by the shareholder to a third party before the execution of the legal relationship, the holder of the call option will not have the opportunity to make a claim for the transfer of the shares to the third party within the framework of the call option. This situation will not change even if the call option is incorporated into the articles of association. As a matter of fact, the Supreme Court has ruled that the share transfer restrictions in the articles of association cannot be asserted against the third party and that it cannot be concluded that the share transfers made to the third party are invalid due to the violation of the provisions regarding the share transfer restrictions in the articles of association.
Accordingly, considering that such restrictions on the shares of a joint stock company, even if they are included in the articles of association, will not acquire a corporative character, without prejudice to certain exceptions, and that they will continue to have the same character of the law of obligations while they are included in the option agreements, in the event of violation of the agreement by the shareholder, specific performance, compensation and penal clause sanctions will be in question within the scope of the law of obligations. However, since specific performance can no longer be demanded by the shareholder in the event of the transfer of the shares to a third party, and since the compensation and penalty clauses that can be applied instead are remedies that are not preferable by the call option holder compared to specific performance, in order to minimize this risk, methods such as recording on the back of the share certificate regarding the call option and the right holder, and intrusting share certificate to a third party are used in practice.
It is crucial to state that, the recording of the call option on the back of the share certificate will not provide full protection to the right holder. As a matter of fact, the third party who take over the share certificate despite the registration of the call option on the back of the share certificate will acquire the ownership of the share certificate and the right holder will not have the opportunity to make a claim based on bad faith.
Another method frequently used in practice is the entrustment of share certificates to a third party. This third party may be a bank, or an escrow agent especially specialized in this field. In case this method is applied, an escrow agreement will be signed with the third party entrusted with the shares. However, in the event that the escrow agent the registered share certificate entrusted to him transfers the share certificate to the shareholder in violation of the provisions of the escrow agreement, and subsequently the shareholder transfers the shares in question to a third party in violation of the call option agreement, the result desired by the holder of the call option will not be achieved and the third party will acquire ownership.
4. IN CONCLUSION
Option rights may be subject to lengthy negotiations and bargaining by the parties in mergers and acquisitions. The call option right, which constitutes one of the option rights, gives the right holder the capability to establish an agreement for the transfer of certain shares to itself by means of a formative unilateral declaration. Even if the call option, which is a restriction on the transfer of shares, can be included in the articles of association of a joint stock company, this right will still be evaluated entirely within the scope of the law of obligations and rights of the third parties on such shares will be protected even though a violation of these provisions is in question. In this context, the parties apply to various practices for the specific performance of the call option by the shareholder, such as recording on the back of the share certificate and applying to the escrow agent. However, these practices do not provide full protection to the right holder. In this respect, the call option agreements should be drafted in a detailed and careful manner.
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Mergers & Acquisitions
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