Turkey: SHA Restrictions On Share Transfers

During acquisition of certain part of a company's shares or establishment of a new company, the major SHA discussions happen around the restriction which will be applied for share transfers. Although the Buyer and Seller or the startup investor and angel investor may have different motives, they all want the same thing: to restrict other party's right to sell all or part of his shares.

These restrictions may be regulated in shareholders' agreement and/or the articles of association of the company. In order to be able to address these restrictions and use these arguments to third parties, it is recommended that they are contained in the company's articles of association. It is also good practice to include such regulations and/or reference to SHA provisions in a legend on the share certificate to prove and make sure that future transferees are also informed of the restrictions. That being said, since some restrictions may not be fully reflected in the articles of association, Parties should always make sure before signing a Shareholders' Agreement that its provisions are practically applicable and in compliance with provisions of applicable law, particularly Turkish Commercial Code.

The restrictions on share transfer which are commonly found can be briefly listed as follows:

One restriction on which both Parties agree is to bring a lock-up provision according to which, shareholders are restricted from selling and/or transferring their shares to third parties for a specified period of time. While this provision is meant to help the investors/buyers for a smooth transition, it also protects the older/startup shareholders from facing with new investors and/or divided and multilateral shareholder structure during such transition period and allows them to benefit from and use the investment effectively.

The typical set of restrictions named the right of first offer or the right of first refusal, provide shareholders the option to keep their company exclusive and closed to new shareholders at a certain level. While the right of first offer requires the selling shareholder to first negotiate the sale of his shares with existing shareholders before offering such shares to third parties, the right of first refusal provides the non-selling shareholder to be able to buy the shares on the same terms or better terms with the third party purchaser offering to buy those shares. Both restrictions are regulated with time-limits and procedural rules which allow the selling shareholder to proceed with the sale of his shares if such rules or time-limits are not respected.

Another set of restrictions named the drag-along right and tag-along right, provide entitled shareholders to sell their shares together with the selling shareholders or to require other shareholders sell their shares together with him if relevant conditions are met.

Change of control clause also acts as a share transfer obligation, if not as a restriction. It gives the holder of this right an increased protection for scenarios where the other party's shareholder or control structure changes. The triggers and of this clause may change depending on discussions of the Parties but the common additional procedures laid down by this clause includes exit/termination rights or acquiring rights for the right holder.

Pre-emptive rights may also be regulated in order to provide certain shareholders, usually investors, to buy future issuances of the company with certain exemptions and/or as an anti-dilution protection.

Although there are common restrictions applied in shareholders' agreements, they should be carefully reviewed and analyzed for each deal and for each negotiation round of the deal, as they may trigger other provisions of the agreement or result in indirect consequences for shareholders in terms of management structure, profit distribution, anti-competition or similar special undertakings.

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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