The purpose of this article is to review current Turkish law
that impacts shareholders' rights and usufruct rights.
Turkish law provides shareholders of a joint stock corporation
with certain, fairly typical rights as are found in virtually
all corporate codes throughout Europe and North America. These
include voting rights in general assembly of shareholders
meetings, rights to collect dividends, pre-emptive rights, the
right to subscribe for new shares, and the right to collect
liquidation proceeds. While some of these rights are strictly
attached (i.e. personal) to the shareholder, some of them are
also available to pledges of shares or usufruct rights
A share pledge is a form of pledge over movables, usually
employed to secure a loan of some type. Under Turkish law, all
shareholder rights, other than the collection of liquidation
proceeds, remain with the pledgor until the share pledge is
foreclosed. However, the parties may agree otherwise in the
share pledge agreement. Therefore, the pledge agreement must
specify who will be entitled to exercise the shareholder
rights. The company must also be notified of such
Any liquidation proceeds that are to be distributed to the
shareholders of the company are included within the scope of
share pledge. Even if there is no specific provision under the
share pledge agreement with respect to the right to collect
liquidation proceeds, if the company whose shares are subject
to the pledge goes into liquidation, the pledgee will be the
beneficiary of the liquidation proceeds, since the proceeds
will in effect substitute for the pledged shares.
As stated above, some rights attached to the shares of a
company can only be exercised by the shareholder itself and
cannot be exercised by the pledgee. For instance, the
pre-emptive right to subscribe to new shares to be issued
corresponding to the pledged shares, such as in the case of a
capital increase in the company or the issuance of bonus
shares, is vested with the pledgor/shareholder. It may be
beneficial for the pledgee to oblige the pledgor under the
share pledge agreement to subscribe to the new shares to be
issued by the company to preserve the value of the pledged
shares, thereby avoiding dilution of the pledged shares.
Furthermore, the pledgor may also undertake to establish
further pledges in favor of the pledgee on those newly
In principle, the share pledge does not grant the pledgee
any voting rights per se; thus, this right also remains with
the shareholder. Nevertheless, contrary to the pre-emptive
right of the shareholder mentioned above, the parties may enter
into a voting agreement empowering the pledgee to attend the
general assembly meetings and vote on behalf of the pledgor. In
order to enable the pledgee to exercise voting rights, the
pledgor must provide the pledgee with a separate proxy
authorizing the pledgee to participate in each general assembly
of shareholders on its behalf. Proxies cannot be irrevocable as
a matter of Turkish law. However, revocation may contractually
qualify as an event of default.
Although the holder of a share pledge cannot automatically
benefit from most of the shareholder rights, the holder of the
usufruct right would automatically benefit from most of the
shareholder rights attached to the relevant shares, including
voting rights and dividends. However; like the share pledge,
the usufruct right does not provide the usufruct right holder
with the pre-emptive right to subscribe for new shares to be
issued by the company. As suggested above for the share pledge
agreements, the usufruct agreement may also oblige the
shareholder to prevent the dilution of the shares subject to a
A usufruct right is a type of an easement right, which
merely provides the use of rights over the shares, rather than
providing a security interest over the shares. Therefore, the
holder of the usufruct right is not entitled to foreclose on
the shares. In order to be entitled both to exercise the
shareholder rights automatically, and to foreclose on the
shares in the event of the borrower's default, it may
be beneficial to simultaneously establish a usufruct right and
pledge over the shares.
The use of shares of joint stock corporations is a popular
means of securing debt obligations. Despite the apparently
simple and straightforward approach of Turkish law on the
subject, care must be taken when drafting security agreements
and pledge agreements in order to appreciate the differences of
the structures discussed in this article. An inadvertent
mistake could result in the loan collateral not being worth the
cost of the paper of the share certificate.
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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