INTRODUCTION
Whilst the free transferability of shares is a fundamental principle in the structure of a public limited company, the adoption of absolute freedom of transfer may also entail drawbacks such as the inclusion of undesirable third parties in the company or the acquisition of shareholder status by individuals who will not fulfil the obligations expected of shareholders. However, the transfer of shares is not merely a process determining the entry of new persons into the partnership structure; it also serves as a functional tool for shareholders in terms of converting their investment into liquidity and realising their intention to withdraw from the partnership relationship.
Particularly in investment relationships, the transfer of shares is one of the primary means by which investors can realise their investments after a certain period or restructure the partnership. For this reason, ensuring that the procedures and conditions for the transfer of shares are foreseeable in advance is important both for the protection of the partnership structure and for the management of shareholders’ exit strategies.
Whilst the Turkish Commercial Code No. 6102 (“TCC”) permits the transfer of registered shares to be restricted under certain conditions by provisions in the articles of association, in practice it is evident that these statutory tools are insufficient for every specific partnership relationship. Particularly in companies with investors, the balance of power among shareholders, exit plans and scenarios involving changes in control require more detailed arrangements.
For this reason, shareholders’ agreements constitute a complementary regulatory framework that grants the parties various contractual rights and powers to safeguard the balance of interests among shareholders, enhance the predictability of the corporate structure, and pre-determine the procedures and conditions for both share transfers and exits in specific circumstances. This study examines pre-emption rights, call and put options, and sale provisions, which are frequently included in shareholders’ agreements relating to public limited companies, as the primary contractual mechanisms in the context of share transfers and exits.
CONTRACTUAL MECHANISMS RELATING TO SHARE TRANSFERS AND WITHDRAWALS
A. Right of First Refusal
The right of first refusal is one of the most common mechanisms established in shareholders’ agreements to preserve the corporate structure and maintain the balance among shareholders. This right grants other shareholders, as specified in the agreement, the opportunity to purchase the shares on a priority basis should a shareholder agree to sell their shares to a third party.
As the transfer of shares in joint stock companies is generally unrestricted, the right of first refusal established by a shareholders’ agreement generally has a relative effect. Consequently, where the obligated shareholder transfers shares to a third party in breach of the obligation, the transfer remains valid; a claim for restitution from the third party is usually not possible, and the remedy for the breach is addressed within the framework of liability for damages.
In terms of the right of first refusal, a distinction is made in doctrine between limited and unlimited rights of first refusal. In the case of an unlimited right of first refusal, the price and procedure are determined in accordance with the terms of the sale to the third party, whereas in the case of a limited right of first refusal, it is possible to stipulate the price or the method of determining the price in the contract in advance. In practice, the explicit stipulation of valuation methods or price-determination criteria in the contract is important for reducing uncertainties that may arise during share transfer processes.
Whilst the right of first refusal is primarily a tool designed to control the entry of third parties into the partnership structure, it also indirectly forms part of the exit mechanism. This is because the requirement for a shareholder wishing to transfer their shares to first offer them to the other shareholders enables the shareholders within the partnership to maintain control over the investment.
B. Call/Put Options and Exit Mechanisms
Call and put options are contractual instruments that play a significant role in the design of share transfer and exit scenarios in shareholder agreements. These options grant the holder the right to purchase or sell specific shares under certain conditions by means of a unilateral declaration, independent of the counterparty’s will.
When a call option is exercised, the holder gains the right to demand the transfer of the shares to themselves; for the counterparty, this creates an obligation to transfer the shares. Conversely, a put option grants the holder the right to sell their shares to the counterparty under specified conditions, whilst placing the counterparty under an obligation to purchase the shares.
Such options play a significant role in the legal design of exit mechanisms, particularly in investor relations. For example, put options may be arranged to enable investors to realise their investments at the end of a specified period; conversely, call options may be granted to majority shareholders, granting them the right to acquire the shares should certain conditions be met.
Options can also be used to resolve deadlock situations that may arise in partnership relationships. In particular, in equal partnership structures, where no agreement can be reached between the parties on managerial or strategic matters, various ‘buy-out’ mechanisms may be included in the shareholders’ agreements. In this context, mechanisms known in practice as “Russian roulette” or “Texas shoot-out” are based on one party offering to purchase the other party’s shares at a specified price, with the other party either accepting this offer and transferring their shares, or purchasing the offeror’s shares at the same price. Such provisions may be included in contracts to prevent prolonged deadlock situations from adversely affecting partnership activities.
In terms of the applicability of option mechanisms, it is important that the shares being sold are specific or determinable and that the consideration is set in a specific or determinable manner. Setting the consideration as a fixed amount, linking it to a calculation formula, or referring to an independent valuation method are commonly preferred approaches in practice. Should these elements not be clearly stipulated, the question of whether a valid sale relationship can be established despite the exercise of the option may become a matter of dispute.
C. Tag-Along and Drag-Along Rights
Tag-along and drag-along rights are mechanisms that play a significant role in shareholder agreements, particularly in the regulation of exit scenarios.
The tag-along right is, as a rule, a provision designed to protect minority shareholders; it grants other shareholders the opportunity to participate in the same sale transaction under the same terms should one shareholder sell their shares to a third party. This enables minority shareholders to reduce the risk of being forced to remain in the company with an unwanted shareholder in the event of a change of control, whilst retaining the option to transfer their shares to the same purchaser.
The drag-along right is a mechanism that grants majority shareholders the authority to include other shareholders in the sale process when selling to a third party. This arrangement facilitates the completion of a sale, particularly in transactions where the aim is to sell the entire company or a controlling stake. This is because buyers often prefer a transaction structure that allows them to gain control over the company or, if possible, acquire all the shares.
Consequently, the drag-along mechanism enhances the company’s marketability by eliminating the risk of minority shareholders blocking the sale process. Conversely, the tag-along provision safeguards the interests of minority shareholders by ensuring that a change of control occurs under equitable terms.
When these two mechanisms are considered together, it is evident that a significant balance is established in the legal design of exit scenarios regarding the sale of the company to third parties within shareholders’ agreements. For these provisions to be effectively implemented, it is crucial that the triggering conditions, the proportion of shares subject to sale, the principle of price parity, and the notification procedures are clearly stipulated in the agreement.
BREACHES AND SANCTIONS
The sanctions applicable in the event of a breach of the rights provided for in the shareholders’ agreement may vary depending on the stage at which the breach occurs.
If the transfer to a third party has not yet taken place, a claim for specific performance may generally arise under the law of obligations. In such a case, the rights holder may demand that the obligation arising from the contract be fulfilled.
Conversely, where the share has been transferred to a third party in a manner contrary to the rights provided for in the contract, a claim for specific performance is generally not possible, as the provisions of the contract do not have direct effect on third parties. In such a case, the rights holder may claim damages for breach of contract.
It is therefore important that mechanisms to mitigate the risk of breaches are clearly and systematically set out during the drafting of shareholder agreements. In particular, specifying in detail the notice periods, procedures for exercising rights, valuation methods and the sanctions to be applied in the event of a breach enhances the effectiveness of the agreement.
CONCLUSION
The right of first refusal, put and call options, and provisions regarding forced sale and joint sale set out in shareholders’ agreements emerge as contractual tools designed to manage risks specific to the partnership relationship without entirely abolishing the principle of the freedom of share transfer.
The right of first refusal right serves to control the entry of third parties into the partnership structure; put and call options grant shareholders the opportunity to exit the partnership or restructure their shareholdings under certain conditions. Tag-along and drag-along provisions, meanwhile, establish a contractual balance between the protection of minority shareholders and the enhancement of the company’s marketability, particularly in scenarios involving sales to third parties.
However, the effectiveness of these mechanisms depends not only on the definition of the rights but also on the clear regulation of the procedures and conditions governing their exercise. Consequently, the design of exit mechanisms in shareholder agreements serves not only the technical aspects of share transfers but also the establishment of a structure aligned with the economic and strategic objectives of the partnership.
