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December 21, 2023

Restriction Of Transfers Of Registered Shares Of Joint Stock Companies By Shareholders’ Agreement

Introduction

Joint stock companies are companies that have a relationship with their shareholders, based solely on the capital, structured as a capital partnership, and as a rule, their shares can freely change hands. 

In practice, rights and obligations regarding the transfer of shares are determined by the shareholders’ agreement (“SHA”), which also allow the stipulation of other aspects of the relationship between shareholders.

In this context, in order to assess the validity and the extent to which the transfer restrictions between shareholders can be asserted when drafting share transfer restrictions in SHAs, it is indispensable to take the mandatory provisions of the Turkish Commercial Code No. 6102 (“TCC”) into account, which aim to ensure the ease of circulation of the shares of joint stock companies.

1. Restriction of Share Transfers Under TCC 

Although the transferability of shares of joint stock companies is the principle, in order to balance the interests provided by the commercial freedom of the shareholders and the economic independence of the company, certain provisions have been established in the TCC to restrict the transfer of shares, which are referred to as bind (bağlam) provisions.

1.1. Statutory Bind

Pursuant to Article 491 of the TCC, even if it is not stipulated in the articles of association, transfers of unpaid shares -other than those arising from the division of inheritance, property regime provisions between spouses, or enforcement- are subject to the approval of the company. The company may reject the request for approval if it doubts the transferee’s capacity to pay and if the requested security has not been provided.

1.2. Bind by Articles of Association

As regulated under Articles 492 et seq. of the TCC, the company may reject the request for the approval of the transfer of unlisted registered shares by citing a material reason stipulated in the articles of association.

The material reason, which is necessary for the application of the bind provisions, is characterized as the reason that justifies the rejection of the request for the approval of the share transfer in order to protect the company’s business subject or its economic independence.

The acquisition of the company’s shares by the following persons is considered as a material reason which enables the application of the bind provisions and therefore requires the company’s approval for the transfer:

  1. persons who are competitors of the company,
  2. persons who do not meet certain qualifications required for shareholders pursuant to special legislation related to the company’s field of activity,
  3. parent companies or subsidiaries that would cause the company to become a subsidiary as a result of the transfer, or
  4. -although debated in doctrine- persons not belonging to a particular family.

In addition to the rejection of the approval request due to a material reason, pursuant to the so-called “escape clause” regulated in the first paragraph of Article 493 of the TCC, the company may reject the approval request by offering to purchase the shares at their real value for its own or another person’s account even if there is no situation that can be qualified as a material reason, provided that it is stipulated in the articles of association.

In the event that the approval request regarding the transfer is rejected within the scope of the context provisions, the ownership right and secondary rights attached to the shares shall remain with the transferor; in other words, the share transfer shall not be deemed valid.

2. Restriction of Share Transfer by SHA

The narrow scope of the bind provisions compared to the transfer restrictions mechanisms required by commercial life has led to the conclusion that the relevant mechanisms to be stipulated in the SHAs independently from the articles of association. 

Although articles of association are mandatory agreements that are regulated within the framework of strict rules in the legislation, primarily the TCC, considering their binding nature on third parties as well as company stakeholders such as company organs and shareholders, since the matters that can be regulated in the articles of association are limited by the TCC, stipulation of certain matters regarding the company in the SHAs is desired. In this respect, since SHAs do not have the characteristic of being asserted against third parties, an attribute which the commercial law grants to the articles of association, they are only effective between the shareholders who are party to the SHA, and are of a relative nature.

2.1. Share Transfer Restrictions Stipulated in SHAs

Share transfer restrictions to be stipulated by SHAs may be determined in line with the freedom of contract and in accordance with the specific case, provided that they do not contradict the imperative rules of law. However, share transfer restrictions established by granting the following rights are the most frequently encountered structures in practice:

  1. Priority right: The offer being made first to the right holder in the event that the shares are to be transferred.
  2. Pre-emption right: The right to acquire the shares to be exercised unilaterally by the right holder, in the event that an offer is received from a third party or an agreement is reached with the third party regarding the transfer of the shares.
  3. Call option: The right to buy the shares with a unilateral declaration upon the fulfilment of certain conditions or within a certain time interval.
  4. Put option: The right to sell the shares with a unilateral declaration upon the fulfilment of certain conditions or within a certain time interval.
  5. Tag along right: The right to participate in the sale of the shares under the same conditions, in the event that an offer is received by the debtor from a third party for the transfer of shares or an agreement is reached with the third party.
  6. Drag along right: The right to include shares of the debtor in the sale under the same conditions, in the event that an offer is received by the right holder from a third party for the transfer of shares or an agreement is reached with the third party.

3. Validity of the Share Transfer Restrictions Stipulated in SHAs

Although the articles of association is a type of agreement that is recognized under the TCC and can be asserted against third parties due to its announcement function, the relative nature of the SHAs leads to the result that the provisions contained therein are binding only for the parties. Therefore, for the share transfer restrictions stipulated in the SHA to be asserted against third parties, they must be reflected in the articles of association.

However, the share transfer restrictions that may be included in the articles of association may not exceed the limits of the bind provisions set forth in the TCC. Transfer restrictions that exceed these provisions will not produce any consequence for third parties, as they will constitute a violation of the mandatory provisions of the TCC. Therefore, transfer restrictions that exceed the bind provisions -even if they can be incorporated into the articles of association in some way- will not prejudice the validity of the transfer made in violation of the provisions it establishes, and will only give rise to an indemnification obligation under the law of obligations for the parties to the SHA.

Conclusion

While it is the principle that the shares of joint stock companies to be freely transferred, in order to protect the economic independence of the company and to realize its business purpose, exceptions to this principle have been established by the bind provisions. However, in practice, share transfer restrictions that exceed the strict limits of the articles of association are regulated by SHAs. However, while it is possible to stipulate more comprehensive restrictions in line with the freedom of contract with the SHAs, it is worth noting that the intended protection cannot be provided in a definitive manner since the relevant restrictions are binding only on the parties, and the only result of the violation of the relevant restrictions is the violating party becoming liable under the law of obligations.

Authors

Demet Akçaalan

Demet Özkahraman

Senior Lawyer

Alptekin Dayı

Alptekin Dayı

Associate