Turkey: A Corporate Guide For Private Equity Funds In Turkey: Shares And Shareholder Rights In Joint Stock Companies

Last Updated: 18 November 2013
Article by Safak Herdem

In contrary to the decrease in European and U.S. markets the private equity funds in Turkey accelerating the volume of the investment day by day. Either financially backed by management buy-outs or leveraged buy-outs the acquisition by a private equity fund has a typical acquisition progress like in a private company.

This article aims to outline the risks in corporate structuring in terms of legal framework of having a share and shareholder rights in joint stock companies and to assist private equity funds with respect to their investments in Turkey.

According to the article 347 of the Turkish Commercial Code ("TCC") shares of a joint stock company can be in cash or in-kind. The minimum nominal value of a share is Kr1 and according to the article 476 of the TCC a share without a nominal value is not recognised.

Pursuant to the provisions of the TCC related to the shares, it is not allowed to divide the shares against the company. In cases where a share has more than one holder, the holders dispose its right only through a representative against the company.

The general assembly providing that the amount of capital remains same is authorized to combine or divide the shares so far, to combine the shares of each shareholders approval is required.

On the other hand it is possible to grant privilege for some share by amending the articles of association ("AoA"). The "privilege" as defined in the TCC means a new type of superior right of ownership of a share not prescribed in the law that grants privilege in dividend, liquidation share and pre-emptive rights.

According to the article 479 of the TCC the privileged voting rights may be granted by designating different number of voting rights to the shares having the same nominal value. Therefore, under the TCC, privileged voting rights may not be granted by designating the same number of voting rights to the shares having different nominal values. Therefore a single share can have a maximum of voting rights. The expansion of the limit shall only be provided by court decision. The privileged voting rights cannot be exercised in amendments of AoA, election of transaction auditors, filing actions for release and liability.

On the other hand, unless otherwise provided in the law or the AoA, the nominative shares can be transferred irrespective of any limit. The transfer of the nominative shares can only be done by transferring the actual possession.

Transfer of the shares can be restricted in AoA and subject to company's approval. This limitation also applies when establishing usufruct. However it is not applied in cases where the company has entered into liquidation process. The AoA cannot restrain the transferability conditions however the company can reject the request of shareholder(s) by offering to purchase the shares on its own or third party's account at current value or by proposing a legitimate reason.

Pursuant to the Law No 6103 on the Entry into Force and Application of the TCC, unless the relevant provision in the AoA is adapted to the TCC such provisions shall be deemed invalid and all voting right privileges shall cease to exist.

The rights of the shareholders defined in Turkish law are as follows:

  • To Participate General Assembly: Shareholders to dispose its rights arising from the shares, participate General Assembly itself, as well as through a representative. Provision of the AoA, that defines the representatives as the shareholder is null and void.
  • To be Authorized Against the Company: Rights of the issued shares, nominative shares and the certificated shares shall be used by the holder or by the person authorized in writing.
  • Voting Rights: The shareholders use their voting rights during the General Assembly in proportion of the total nominal value of shares. Each shareholder shall hold at least one voting right even if he holds only one share. In so far, the number of votes to be granted in favour of the shareholders having more than one share may be limited by the AoA.
  • To Obtain and Review Information: In the general assembly, the shareholder can request the board of directors, auditors to provide information about the results of the audit and the way it was done. The right to obtain and review information cannot be removed or limited by AoA or decision of any organs of the company.
  • Appointment of Independent Auditor: Every shareholder has the right to request the appointment of an independent auditor whenever it necessitates exercising its shareholders' rights in the general assembly meeting although it is not included in the agenda, and provided that the information or evaluation right has already been exercised.

Shareholders holding at least ten percent of the share capital for closely held companies, and twenty percent for publicly held companies are defined as minority shareholders.

The rights of the minority shareholders defined in Turkish law are as follows:

  • To Request the Convocation of the General Assembly: Minority shareholders are a entitled to request the convocation of the general assembly, or in case the general assembly has already been convoked, the inclusion of the subjects they wish to be discussed in the general assembly to the agenda. The convocation and request of inclusion of a subject to the agenda shall be realized before the notary public.
  • To Request the Postponement of Financial Statements Discussions: Minority shareholders are entitled to request postponement of balance sheet discussions for one month.
  • To Request Dissolution of the Company: Minority shareholders may request the dissolution of the company by filing a lawsuit before the commercial court of first instance that has jurisdiction over the headquarters' address.
  • To Request the Right of Representation in the Board: Minority shareholders and a certain group of shareholders may be granted the right of being represented in the board by the AoA.
  • To Apply Court for Replacement of the Auditor: If there are just causes, the minority shareholders may apply to the court for replacement of the auditor.

A company cannot acquire and accept as pledge its own shares in return for consideration, at an amount which exceeds or will exceed as a result of a transaction, one-tenth of its basic or issued capital. This provision shall also be applicable to the shares, which a third party acquires or accepts as pledge in his/her name, but in the account of the company. In order for the shares to be acquired or accepted as pledge in accordance with the provision above, the general assembly must have authorized the board of directors to act in this matter. This authorization, which can be granted for a maximum of five years, must show the lower limit and upper limit of the price, which can be paid for shares to be acquired, and the total nominal values of the shares to be acquired or accepted as pledge. The board of directors must state in each of its proposals for permission that the legal requirements have been met.

In addition to the requirements mentioned above, after the prices of the shares to be acquired are deducted, the company's remaining net assets must be at least equal to the sum of the reserves that may not be distributed according to law and articles of association, and of basic or issued capital.

In accordance with the above-mentioned provisions only shares that have been paid in full can be acquired. The provisions above shall also be applied in case that the parent company's share are acquired by its subsidiary.

Legal transactions, which the company performs with a person for the acquisition of its shares with regard to granting an advance, a loan or security, shall be null and void. This nullity provision shall not be applied to transactions within the scope of activity of credit and finance organizations and to legal transactions in regard to granting an advance, a loan or security to the employees of the company or of its dependent companies for the purpose of acquiring the company's shares.

Furthermore, a contract between the company and a third party which grants this person the right to acquire the company's own shares in the account of the company, of its dependent company or of a company the majority shares of which are possessed by the company, or which stipulates such a liability for this person in this regard, shall be null and void.

A company can acquire its own shares without being subject to the following cases:

a) If it is applying the provisions relevant to decreasing its basic or issued capital.

b) If it is a requirement of the universal succession rule.

c) If such acquisition is arising from a statutory purchase liability.

d) Provided that the full price is paid and if it is intended for the collection of a company receivable through execution proceedings.

e) If the company is a securities and investment banking company.

A company cannot subscribe to its own shares. Subscription to the company's shares by a third party or a subsidiary in its own name but on behalf of the company shall be considered as the company subscribing to its own shares.

The company's own shares acquired by the company and the shares of the parent company acquired by the subsidiary shall not be taken into account while calculating the parent company's general assembly meeting quorum. Excluding the acquisition of gratis shares, the company's own shares taken over by the company shall not grant any shareholding rights. The voting right pertaining to the parent company shares acquired by the subsidiary and affiliated rights shall be suspended.

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.

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