March 2003 - Reviewed in December 2003, after Communiqué numbered IV/31)
I. SUBJECT MATTER
II. LAW PROVISIONS
1. Scope of Law Provisions
2. Method of Use of Accumulative Voting Right
3. Use of Accumulative Vote
III. PROVISIONS OF THE COMMUNIQUE
1. Purpose of the Communiqué
2. "Minority" Concept
2.1. Individual Rights Granted to Shareholders
2.2. Vested Rights
2.3. Minority Rights
2.4. No Minimum Rate Required For Use of Accumulative Vote
3. Definition of "Method of Use of Accumulative Vote"
3.1. Determination of Number of Accumulative Votes
3.2. Use of Accumulative Votes
4. Method being Compulsory or (Optional) Method in accordance with the State of the Company
5. Duties of Joint-Stock Companies in Use of Method
5.1. Provisions in Articles of Association
5.2. Liability of Board of Directors
5.3. Liability of Disclosure on Method
6. Voting Procedure in General Assembly Meetings
6.1. Use of Methods Together
6.2. Use of Ballot Paper
6.3. Assumption of Equal Distribution of Votes
6.4. Duty of Chairman of General Assembly Meeting
6.5. Condition of Validity in Voting by Proxy
7. Liability of Accumulative Voter
8. A Comment
MEMORANDUM ON USE OF ACCUMULATIVE VOTES IN JOINT-STOCK COMPANIES
I. SUBJECT MATTER:
Sub-paragraph (v) of article 22 of the Capital Markets Law pertaining to the duties and powers of the Capital Markets Board allows use of accumulative votes in joint-stock companies. And the "Communiqué About Principles of Use of Accumulative Votes in General Assembly Meetings of Joint-Stock Companies Subject to the Capital Markets Law", Serial IV No. 29, has been published by the Capital Markets Board in the Official Gazette on 18 February 2003, with immediate effect.
In this Memorandum, we are going to summarize the provisions of the Communiqué.
II. LAW PROVISIONS:
Listed among the duties and powers of the Capital Markets Board in sub-paragraph (v) of first paragraph of article 22 of the Capital Markets Law is:
"To make arrangements about the method of accumulative use of the voting rights, in full or in part, for each seat in the board of directors and the board of auditors, in election of one or more members thereto, in the general assembly meetings of the joint-stock companies subject to the Law".
1. Scope of Law Provisions:
Pursuant to the Law provisions, the legislative arrangements on accumulative vote:
i. are applicable only on the joint-stock companies subject to the Capital Markets Board; and
ii. are applicable for the voting rights in general assembly meetings of the said joint-stock companies; and
iii. are applicable on decisions for elections of members to the board of directors and the board of auditors.
iv. The law mentions about joint-stock companies subject to the Capital Markets Law. As known, companies subject to this Law are joint-stock companies which issue securities and other capital market instruments as an "issuer". Such companies are called and named as "public joint-stock companies". However, the Law mentions about "joint-stock companies subject to the Law", rather than the above cited term. This leads us to think that "accumulative vote" may be used also in the "capital market companies" in the status of a joint-stock company, and the Law seems to cover all such companies.
2. Method of Use of Accumulative Voting Right:
"Accumulative vote" is a voting method. According to the limited definition given by the Law, the "accumulative voting" method may be used (i) in general assembly meetings, and (ii) in election of (iii) members of board of directors and (iv) members of board of auditors, and (v) the accumulative voting rights for each seat therein may be used (vi) in full or in part (vii) in election of one or more members therein.
3. Use of Accumulative Vote:
According to the Law, accumulative vote may be used "in full" or "in part". This may be construed as follows: the voter may use a part of his votes with the "accumulative vote" method, and use the rest of his votes with the usual/normal method. Furthermore, it is also understood that the voter may either vote for a SINGLE nominee for the seats of board of directors or board of auditors voted in the general assembly meeting, or divide his votes among more nominees.
III. PROVISIONS OF THE COMMUNIQUÉ:
1. Purpose of the Communiqué:
The Communiqué, no. IV/29", is issued "in order to set down the principles and procedures of use of accumulative votes so as to enable representation of minority shareholders in board of directors and board of auditors of a corporation".
2. "Minority" Concept:
Against majority shareholders or shareholders holding majority of capital shares or a privilege in management of a joint-stock company, the holders of shares negligible in the meeting and decision quorums according to the Turkish Commercial Code can, due to the number or distribution of their shares, not fully use the rights granted to them by the laws. In order to understand the minority rights in joint-stock companies envisaged in the Turkish Commercial Code, we must collectively review the legislative arrangements pertaining to protection of interests and rights of shareholders of a corporation.
2.1. Individual Rights Granted to Shareholders:
These rights are shortly referred to as "shareholding rights". Examples of these rights are:
- the right to bring an action for rescission against the general assembly decisions (Article 381 of the Turkish Commercial Code);
- the right to bring an action of "liability" against members of the board of directors and against statutory auditors (Articles 336 and 346 of the Turkish Commercial Code);
- the right to attend the general assembly meetings (Articles 378 and 381 of the Turkish Commercial Code);
- the right to vote in the general assembly meetings (Article 373 of the Turkish Commercial Code);
- the right to get information about management and financial operations and decisions of the joint-stock company;
- the right to demand dividends according to the year-end balance sheet or according to the interim balance sheets in the public joint-stock companies, if and to the extent permitted by the Capital Markets Law (Articles 466 and 470 of the Turkish Commercial Code); and
- the right to have a share in the proceeds of liquidation if and when the corporation is liquidated.
2.2. Vested Rights:
Article 385 of the Turkish Commercial Code refers to "vested rights". According to that Article, "unless otherwise agreed and specified in the articles of association", the general assembly of shareholders may decide to amend all articles of the articles of association in accordance with the provisions of the articles following Article 385, but "no amendment may be made in the vested rights of the individual shareholders without their consent". The Turkish Commercial Code defines the vested rights in the same Article as follows:
"Vested rights are the rights that are not subject to decision of the general assembly or the board of directors or that arise out of the right to participate in the general assembly meetings, according to the pertinent provisions of the laws or the articles of association, and particularly, the rights of:
- bringing an action of rescission,
- dividend and profit share, and
- having a share in the proceeds of liquidation..."
In the light of these "examples" given by the Law, the "vested rights" may be defined as "the rights that cannot be withdrawn or eliminated without consent of the shareholder". However, it is argued in the law doctrine that these rights may be changed or amended by majority vote, subject to the objective good faith rules and principles.
2.3. Minority Rights:
The rights granted by the Turkish Commercial Code to holders of 1/10th of the capital shares or the total voting rights, who are expressed and called as "minority shareholders", may be listed as follows:
i. the right of minority shareholders to demand legal actions against directors and statutory auditors of the corporation, pursuant to Article 341 of the Turkish Commercial Code;
ii. to request appointment of a special auditor by a general assembly decision, pursuant to Article 348 of the Turkish Commercial Code;
iii. the right "to file a complaint to the statutory auditors" thereby obliging the statutory auditors to issue and submit a report, pursuant to Article 356 of the Turkish Commercial Code;
iv. the right to call the general assembly for a meeting or to request addition of items to agenda of the general assembly meeting, pursuant to Articles 366 and 367 of the Turkish Commercial Code; and
v. the right to demand postponement of the balance sheet discussions in the general assembly meeting, pursuant to Article 377 of the Turkish Commercial Code.
In addition to rights granted to 1/10th minority shareholders by the clearly "positive" provisions of the Law, Article 310 of the Turkish Commercial Code grants minority shareholders the right to prevent a decision by using "negative" vote. For instance, if shareholders holding at least 1/10th of the share capital do not approve release of the directors, the decision of the general assembly for release of the directors is deemed invalid.
However, for use of the aforementioned "positive" and "negative" minority rights granted by the Turkish Commercial Code, the shareholders holding or representing ONE TENTH of the share capital are required to act collectively. But we must also say that paragraph 8 of Article 11 of the Capital Markets Law provides that 1/20th (or 5%), in place of 1/10th, is applicable and sufficient for use of the minority rights set down in Articles 341, 348, 356, 359, 366, 367 and 377 of the Turkish Commercial Code in the public joint-stock companies
2.4. No Minimum Rate Required For Use of Accumulative Vote:
As mentioned above, a minimum vote, such as 1/10th or 1/20th, is required for use of the minority rights respectively according to the Turkish Commercial Code and in the public joint-stock companies. However, the Communiqué IV/29 does not refer to the "minority rights" and the relevant laws, and only mentions about the "minority shareholders" having the right to be represented in board of directors and board of auditors of the corporation. This means to say that the Communiqué does not technically require a minimum vote of 1/10th or 1/20th, and considers "minority shareholder or shareholders" as "any shareholder" who is not a part of majority and is therefore accepted to be a part of the minority group, irrespective of the percentage of his shares in the capital.
3. Definition of "Method of Use of Accumulative Vote":
3.1. Determination of Number of Accumulative Votes:
According to the Communiqué, the number of accumulative votes is calculated and determined "by multiplying the number of votes (i) owned and held by the participant of the general assembly meeting or (ii) held by the participant as a proxy of other shareholders, by the number of members to be elected to the board of directors or the board of auditors. It is obvious that the number of accumulative votes will be calculated separately for elections to the board of directors and for elections to the board of auditors.
3.2. Use of Accumulative Votes:
The accumulative votes calculated and determined as above, depending on the number of members to be elected to the board of directors or the board of auditors, may be used by the general assembly participant either fully for a SINGLE NOMINEE or by being divided among SEVERAL NOMINEES, in his option and discretion.
4. Method being (Compulsory) or (Optional) In Accordance With the State of the Company:
An important provision set forth by the first version of the Communiqué, on the date of February 2003, is that the accumulative vote method is not mandatory, but OPTIONAL for the corporations. The corporations wishing to use this method first of all had to accept this method in their articles of association and accordingly had to incorporate a CLEAR PROVISION about this method in their articles of association.
This "optional" discretion is only to make the markets and public joint-stock companies "familiar with" and "accustomed to" this method. In fact, the law maker may have intended to create a system close to the "Corporate Governance" rules (or in Turkish, "Kurumsal Yönetim"1 ) which are stipulated both by OECD and EU in the recent years with a view to facilitating international movement of foreign capital. Among these rules and principles, in addition to representation of the minority shareholders in the managerial bodies of the corporation, some procedures are also specified in order to support election of independent members to the board of directors. In our opinion, this model which aims to enable the minority shareholders holding a certain percentage in the capital to be represented in the board of directors and the board of auditors has been subject to certain changes in a short period of time, and after it is "generally" accepted, for certain cases it has been made mandatory.
According to Communiqué numbered IV/31 which has been published in the Official Gazette dated December 21, 2003 and amended the Communiqué numbered IV/29, (it is required that there is a clear provision in the articles of association of the corporations in order to implement the accumulative voting method). It has been made COMPULSORY that the corporations whose share certificates are not traded in the stock exchange and whose number of shareholders are "somehow understood" to be constantly ABOVE 500 in the last two years, apply accumulative voting method and accept this method in their articles of association. In the presence of such a case, in their FIRST ORDINARY GENERAL ASSEMBLIES, corporations shall adjust their articles of association in accordance with the relevant legislation. For other corporations, the matter continues to be optional.
According to the temporary article of the Communiqué, corporations that are subject to such obligation are required to make the necessary amendments in their articles of association in their first ordinary general assemblies after the date of December 21, 2003.
It is also necessary to explore the reasons why accumulative voting method has been made compulsory only for the corporations whose share certificates are not traded in the stock exchange in Communiqué numbered IV/31. It may be thought that such an obligation is imposed on the Publicly Traded Joint Stock Companies that have sold their shares in question because of the fact that when the shares of Publicly Traded Joint Stock Companies that are traded on the Stock exchange, the attitude and transparency of the management may be taken into consideration but in a way there are no such protection possibilities for the holders of the shares that are not traded on the stock exchange and have been sold within the quota of sale to public.
5. Duties of Joint-Stock Companies in Use of Method:
5.1. Provisions in Articles of Association:
Accumulative votes may be used in general assembly meetings of the joint-stock companies subject to the Capital Markets Law only if and when their articles of association contain the following provisions:
In the Articles of Association:
i. There MUST BE A CLEAR PROVISION allowing the holders of all "voting" shares to use accumulative votes for one or more nominees in the elections to the board of directors and the board of auditors.
ii. The flexibility of election of members to the board of directors between two certain figures in a range allowed by the Turkish Commercial Code must be superseded by a FIXED number for members to be elected to the board of directors and the board of auditors.
iii. There must be a provision stipulating that elections for ALL of the new members in place of the members who resign before the end of their term of office must be held in the same general assembly meeting, except for elections to the board of directors pursuant to Article 315 and elections to the board of auditors pursuant to Article 351 of the Turkish Commercial Code.
This provision of subparagraph (c) of first paragraph of Article 6 of the Communiqué must be considered and interpreted together with the provisions of second paragraph of Article 7 thereof. To wit: Article 7/2 provides that "the calculation of number of accumulative votes will be based on the number of members to be elected to the board of directors and the board of auditors as stipulated in the articles of association". It may be thought and concluded that the Communiqué is not very clear on whether the phrase "member to be elected to the board of directors ..." in Article 7/2 refers to only the members to be elected under a usual agenda item, in the case of renewal of a part of the board of directors every year pursuant to the articles of association, or to election of all members in the same general assembly meeting, meaning renunciation from the rotational election of a part of the board of directors on yearly basis.
iv. There MUST NOT BE ANY PROVISION GRANTING PRIVILEGES in voting for elections to the board of directors and the board of auditors, or the existing voting privileges, if any, must be removed.
v. If there exists a PRIVILEGE IN NOMINATIONS for elections to the board of directors and the board of auditors, a new clause must be added for election of ONE THIRDS OF THE TOTAL NUMBER OF MEMBERS in each of the board of directors and the board of auditors from among the nominees to be nominated in the general assembly meeting, IRRESPECTIVE OF THE NOMINATIONS made by the shareholders group having the privilege in nominations. (1/3 provision has been set by IV/31)
5.2. Liability of Board of Directors:
It is clearly provided in the Communiqué that the board of directors is liable to the shareholders for the actions and TRANSACTIONS of the corporation aimed at REDUCING THE EFFECTS of accumulative voting (Article 6/2).
5.3. Liability of Disclosure on Method:
Corporations which have accepted the accumulative voting method are held obliged to make DISCLOSURES on the method of use of accumulative votes in:
- the PROSPECTUSES relating to capital increase and
- the ANNOUNCEMENTS relating to general assembly meetings.
6. Voting Procedure in General Assembly Meetings:
6.1. Use of Methods Together:
The Communiqué provides that if the agenda of general assembly meeting contains elections for the board of directors and for the board of auditors, the ACCUMULATIVE VOTING METHOD applicable by shareholders wishing to use accumulative vote and the GENERAL VOTING METHOD applicable by shareholders wishing to vote in accordance with the general law provisions will be used and employed together.
6.2. Use of Ballot Paper:
Use of "ballot paper" is obligatory in accumulative voting, because the ballot papers show DISTRIBUTION of accumulative votes. In addition, the ballot paper shows:
- the number of voting rights held by the voter; and
- the name and surname of the voter; and
- the signature of the voter.
It is understood from this provision of the Communiqué that whether the voter is a natural person or a legal entity, and whether the vote is used in person or by a representative or by proxy, identity of the "voter" must be absolutely shown on the vote ballot, and the accuracy of identity data must be certified by signature of the voter thereon.
6.3. Assumption of Equal Distribution of Votes:
If the voter who uses accumulative votes in the general assembly meeting does not vote for a single nominee, he must indicate the distribution of his votes. However, if an accumulative vote is used without reference to distribution of votes, in this case, the voter is assumed to HAVE SHARED HIS VOTES EQUALLY without making any discrimination among the nominees who are voted for by him.
6.4. Duty of Chairman of General Assembly Meeting:
Pursuant to the Communiqué, after the ballot papers of accumulative votes are presented to the chairmanship committee of the general assembly meeting, the Meeting Chairman is "held obliged" to CHECK the "number" of accumulative votes and to take MEASURES in order to prevent DOUBLE VOTES in elections.
6.5. Condition of Validity in Voting by Proxy:
In the case of voting by proxy in general assembly meetings of the public joint-stock companies regulated by the Communiqué IV/8 of the Capital Markets Board, a "form" will be given to the proxy according to the said Communiqué. If the principal instructs the proxy "to use accumulative vote" in the said form, the proxy IS OBLIGED TO USE ACCUMULATIVE VOTE FOR THE SUBJECT SHARES. However, if the "form" does not contain such an instruction, the proxy may not himself prefer to use an accumulative vote, and in this case, the proxy may use his votes only in accordance with the general law provisions.
This principle on use of accumulative votes by proxy is naturally valid also for "collection of proxy forms by call" applied in acquisition of a company.
7. Liability of Accumulative Voter:
The accumulative voter is liable to:
- INFORM the corporation in WRITING about his INTENTION to use accumulative vote,
- no later than TWO BUSINESS DAYS PRIOR TO the date of the general assembly meeting.
8. A Comment:
The legislative arrangement adopted by the Capital Markets Board about the accumulative votes is, in our opinion, on one hand, a result of performance of the duty assigned by the Law to the Capital Markets Board and on the other hand, an indication of the intention to develop and facilitate the use of minority rights of minority shareholders of a joint-stock company, under the effects of the changing and developing international concepts.
The "optional" discretion aims at making the corporations more familiar with the new concepts, and depending on the future developments, the purpose is to encourage stock investments in the capital markets by protecting the minority rights. However some usual minor problems and conflicts between the capital market provisions of the Turkish Commercial Code based on the Continental European law system, and the provisions of the Capital Markets Law based on a more contemporary approach are likely on this matter as well. Therefore, even before this legislative arrangement is made mandatory, some additional arrangements may be needed. For instance, according to Article 312 of the Turkish Commercial Code, a board of directors is composed of minimum three members. In this case, it is practically impossible to use accumulative vote, because pursuant to Article 330 of the Turkish Commercial Code, for decision quorum in the board of directors, "at least one more than half of the full number of members must be present in the meeting". This means to say that if all of the three members are not present in a meeting, and if one of these three members has been elected from among nominees of the minority shareholders by accumulative vote, and if that member does not attend the board meetings, the company may face a deadlock in decision making. For this reason, we believe that the board of directors of a corporation subject to the Capital Markets Law where accumulative votes are allowed must be composed of minimum 5 members.
The Communiqué on accumulative vote is a useful progress in terms of capital markets, but by considering the already existing difficulties encountered by board of directors of a company formed by various different capital groups as per the Turkish Commercial Code, and the risk of disturbing the fine balances established by special agreements in the foreign capital corporations, the legislation must give priority to resolution of practical problems.
Footnotes1. Some have initially translated the “Corporate Governance” term as “Yönetişim”, but generally, the term “kurumsal yönetim” is preferred.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.