One of the events for succession of shares in limited liability companies is through share transfer. The transfer of shares, in principle, is subject to the approval of the general assembly. Contrary to joint stock companies, the transfer of shares in limited liability companies cannot be made freely, and is subject to a requirement as to form. One of the most important novelties brought by the Turkish Commercial Code1 ("TCC") on this matter is the facilitation of transfers. This novelty is a consequence of the strengthening of the stock corporation nature of limited liability companies.
This Newsletter article focuses on the provisions of the TCC regarding the transfer of shares in limited liability companies. The succession of shares by way of inheritance, provisions on marital property or enforcement proceedings are not separately examined hereunder.
Share Transfer Agreement
Form of the Agreement
As per Article 595/1 of the TCC, the transfer of the shares and transactions causing the obligation to transfer shall be made in writing, and the signatures of the parties shall be certified by a notary. According to the Preamble of this Article, written form and certification of the signatures by a notary "are necessary in terms of evidence, provide safety, and are proper tools to direct the parties to consider the transfer, especially the additional payment and side obligations, and other contractual obligations"2. Through the expression "transactions causing the obligation to transfer", one should also understand unilateral transfer commitments, as well as the promise to transfer agreements.
It is debated under the doctrine whether or not notarial certification is mandatory. According to the legal scholars arguing that notarial certification is not of mandatory nature, if the share transfer agreement is made in writing and approved by the general assembly without having a notarial certification, validity of the transfer is not affected. Whereas it is explicitly regulated under the former Commercial Code ("Former TCC") that "unless the transfer of shares and the agreement for the promise to transfer are made in writing and the signatures are certified by the notary, transfer shall not take effect even for the concerned parties"; this provision is not included within the scope of the TCC. Nonetheless, there is no need to construe the certification of the signatures by the notary differently from the regulation under the Former TCC. The formal requirement in question is written form subject to official certification, just as in the certification of the signatures on the articles of association of the companies (TCC Art. 575). Therefore, a transfer agreement signatures of which have not been certified by a notary shall not gain validity with the general assembly decision.
Content of the Agreement
Under the share transfer agreement, additional payment and side obligations, non-competition obligation if aggravated or extended in such a way to cover all of the shareholders, rights to be addressed for suggestion, pre-emption rights, repurchase and option rights, as well as contractual penalties, shall be also specified.
It is mandatory to explicitly include such numerus clausus conditions under the share transfer agreement. The reason for this, according to the Preamble, is to provide that the transferee is fully aware of its obligations, and to impose the burden upon the seller to inform the transferee in this regard3. According to the Preamble, again, non-inclusion of such conditions under the share transfer agreement does not invalidate the agreement; however, it leads to the liability of the transferor. Notwithstanding this, according to the dominant view under the doctrine, which is different from the Preamble, in the case of non-inclusion of these provisions completely, or partially, under the transfer agreement, the transfer agreement shall be deemed invalid.
Approval of the General Assembly
Unless specified otherwise under the articles of association, for the transfer of shares, approval of the shareholders' general assembly is mandatory. Since it is explicitly stated under the TC that the share transfer shall become valid with this approval, approval is a condition for validity. The Swiss Code of Obligations regulates the timing of transfer of rights through a separate article, and also sets forth that the transfer shall be valid only when approved by the general assembly, if necessary. In such a case, it is clear that the transferor, but not the transferee, must attend the general assembly meeting wherein the transfer will be approved. This is because the owner of the subject shares is the transferor shareholder until the approval or rejection decision of the general assembly is made.
Such approval is among the non-transferable rights of the general assembly and cannot be transferred to other bodies or persons, such as the board of managers. Approval of the share transfer is not one of the important decisions in terms of Article 621 of the TCC. Therefore, the general assembly shall make the decision regarding the approval of the share transfer with the simple majority of the votes represented in the meeting within the scope of ordinary decision taking procedures regulated under Article 620 of the TCC. As per the general provisions, it is possible to stipulate higher quora under the articles of associations.
Provisions under the Articles of Association
Under the articles of association, it is possible to remove the approval requirement for the share transfer, as well as to prohibit the transfer of shares, or to soften or aggravate the transfer conditions. Approval not being mandatory and the possibility to prohibit or restrict the transfer indicate that the TCC leaves the share transfer order to the discretion of the shareholders, and the legislator does not deem it appropriate to intervene in this subject4.
If the articles of association regulate the events where the transfer will not be permitted, the general assembly will be obliged to comply with such regulations, and cannot refrain from approving, other than in those events specified under the articles of association. Similarly, in the event of existence of provisions prohibiting or aggravating the transfer, the general assembly will be bound by such while taking the decision for approval.
Restriction, prohibition, or facilitation of the transfer of shares is among the important decisions. The general assembly is entitled to decide upon the removal of the approval requirement, or prohibition of the transfer, if at least two-thirds of the votes represented in the meeting and the simple majority of the entire share capital exist at the same time. As per the general provisions, it is possible to stipulate higher quora under the articles of associations.
Disapproval by the General Assembly
The general assembly does not have to approve the transfer. Unless specified otherwise under the articles of association, the general assembly is entitled to reject the transfer without giving any reasons. However, this authority cannot be used for convenience, or in breach of good faith principles5. In the event of rejection, the transfer shall not take effect for the parties, nor for the company.
If the articles of association prohibit the transfer, or the general assembly does not approve it, the subject shareholder's right to exit from the company with just cause is reserved. The transferor shareholder must then request from the court to exit from the company by claiming that there are just causes preventing him from staying in the company6. This right is also included under Article 786/3 of the Swiss Code of Obligations.
The general assembly shall be deemed to have approved the share transfer if it does not reject it within three months as of the application. Accordingly, the TCC aims to prevent the general assembly from impeding the transfer by way of remaining silent. This period is determined as six months under Article 787 of the Swiss Code of Obligations.
Finally, as per Article 595/6 of the TCC, if additional payment or side obligations are regulated under the articles of association, and if the security requested from the transferee due to doubts on its payment ability has not been provided, the general assembly is entitled to reject the transfer even though there is no provision under the articles of association in this regard. The purpose here is to protect the company. Existence of a provision to request security under the articles of associations is not necessary. If the general assembly remains silent where the requested security has not been provided, it should not be deemed to have granted approval upon the expiry of the three months' term.
Transfer of Printed Shares
One of the most important novelties brought by the TCC is that it provides the opportunity to print the shares as a means of evidence, or as registered share certificates (TCC Art. 593/2). Once the share certificates are issued, it is required to explicitly specify on the certificates the additional payment and side obligations, non-competition obligation aggravated or extended in such a way to cover all of the shareholders, and the rights to be addressed for suggestion, pre-emption rights, repurchase and option rights regulated under the articles of association (TCC Art. 593/2).
In cases where the shares are bound to registered share certificates, it should be evaluated whether the transfer will be made by a written declaration of transfer and delivery of the shares certificates to the transferee (TCC Art. 647), or by following the procedure under Article 595 of the TCC.
Article 593 of the TCC does not set forth any specific regulation in terms of registered share certificates; to the contrary, it provides that "... capital share can be only transferred as per the provisions below, including transfers among the shareholders, and passes by way of inheritance." Therefore, for the transfer of the shares bound to registered share certificates, as well, the procedure under Article 595 of the TCC must be followed, a share transfer agreement must be made (which must comply with the formal requirement provided under Article 595 of the TCC, different from Article 647 of the TCC), and approval of the general assembly must be obtained. It is also stated under the Preamble that the issuance of a registered share certificate shall not provide a convenience in the transfer of shares and the provisions of Article 595 of the TCC and the following articles shall continue to apply7. However, transfer procedures may be simplified by eliminating the requirement for approval of the general assembly by way of articles of association. Legal doctrine rightfully criticizes non-granting of a facilitating function to the issuance of registered share certificates.
Registration and Share Ledger
A last step for the transfer of shares in limited liability companies is the registration of transfers. Managers of the company should make an application to the trade registry for this step. Registration is not constitutive, but explanatory. As stated above, as per Article 595/2 of the TCC, transfers shall take effect with the approval of the general assembly. The date of the transfer is the date of approval by the general assembly. The TCC also entitles the transferor shareholder to apply to the trade registry for the removal of its name regarding such shares, if the application is not made by the managers within thirty days.
The transfer of shares shall be also annotated in the company's share ledger. This annotation is not constitutive, but is only a necessary procedure to ensure transparency in company records.
In limited liability companies, in principle, capital shares can be transferred. However, a transfer is subject to several formal requirements and conditions. Although the approval of the shareholders' general assembly is sought, in principle, for the transfer of shares, articles of association of the company may deviate from this non-compulsory provision. With provisions to be included under the articles of association, approval requirement for share transfers may be removed, share transfers may be prohibited, and conditions for share transfers may be softened or aggravated. Issuance of registered share certificates for shares does not provide any particular convenience in terms of transfer, and the procedure under Article 595 of the TCC is followed. Following the general assembly's approval, request for registration shall be made before the trade registry by the company managers, and the transfer shall be annotated in the share ledger. The general assembly, provided that it is in compliance with the provisions of the articles of association, is entitled to reject the transfer. In the event of rejection, the transfer shall not take effect for the parties, nor for the company.
1. Official Gazette February 14, 2011, No. 27846. It has entered into force on July 1, 2012.
2. Preamble of Article 595 of the TCC.
3. Preamble of Article 595 of the TCC.
4. Ünal Tekinalp, New Law of Stock Corporations, 3rd Edition, İstanbul 2013, p. 483.
5. Hasan Pulaşlı, Companies Law General Provisions, Updated 2nd Edition, Ankara 2013, p. 728.
6. See H. Ercüment Erdem, Withdrawal and Expulsion from Limited Liability Companies ("LLC") Incorporated by Two Shareholders, http://www.erdem-erdem.com/en/articles/withdrawal-and-expulsion-from-limited-liability-companies-llc-incorporated-by-two-shareholders/ (Access date: 8 April 2016) and Süleyman Sevinç, Exit Right and Squeeze Out from Limited Liability Companies, http://www.erdem-erdem.com/en/articles/exit-right-and-squeeze-out-from-limited-liability-companies/ (Access date: 8 April 2016) for information on exit and squeeze out rights in limited liability companies.
7. Preamble of Article 593 of the TCC.
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.