Former Turkish Commercial Code numbered 6762 ("Former TCC") as well as the current Turkish Commercial Code numbered 6102 ("TCC") have granted pre-emptive rights to the shareholders of joint stock companies ("JSC") and limited liability companies ("LLC") when there is a capital increase through external resources. Thus, shareholders are able to procure newly-created shares in proportion to the shares they currently own in the company.
Even though the Former TCC also contained provisions which allowed shareholders to use their pre-emptive rights, the TCC has more comprehensive provisions with clear limitations on such rights which aim to protect the shareholding ratio of the shareholders.
II. Pre-emptive rights in JSCs
In order to use pre-emptive rights, there has to be a general assembly resolution regarding capital increase.
Restrictions on the shareholders' right to acquire newly-created shares are regulated with Article 461 of the TCC. Even though the article itself does not contain a provision that specifically prohibits a change in preemptive rights with the articles of association of a company, preamble of Article 461/2 expressly prohibits restriction and removal of pre-emptive rights in such a way. On the other hand, the same article allows JSCs to restrict or remove pre-emptive rights provided that they abide by three main rules set forth under Article 461 paragraph 2:
(i) Just cause. There must be just cause for restricting/removing pre-emptive rights. The term "just cause" is not defined in Article 461 however both the article and the preamble have given several examples which can be listed as follows: public offering, business acquisition, acquisition of subsidiaries, employees' participation in the company, financial interests of the company, and purchase of technology.
(ii) Affirmative vote of at least sixty percent of the share capital in the general assembly meeting. Unlike Article 421/1 which requires an affirmative vote of at least fifty percent of the share capital in the general assembly meetings for capital increases, this article requires a heavier quorum. Such difference in quorum further emphasizes legislative intent to preserve shareholders' share ratio in the company.
(iii) No person will unjustly gain benefit or incur losses as a result of the restriction or removal. This rule emphasizes the principle of equal treatment and limitation of majority power, alongside the intent to prevent dilution of shares.
Article 461/3 also states that there has to be a resolution of the board of directors defining the principles of the right to obtain new shares and the board must grant at least 15 (fifteen) days to the shareholders to decide whether they will use their pre-emptive right. The resolution is next registered and published in the Trade Registry Gazette and displayed on the company's website. Furthermore, shareholders are allowed to transfer their preemptive right to others as per the fourth paragraph of Article 461.
III. Pre-emptive rights in LLCs
Although the Former TCC defined preemptive rights in LLCs, it did not contain any provision regarding how to enforce such rights. Therefore, with the same incentives explained above, Article 591 was included in the TCC.
According to Article 591, every shareholder has the right to participate in capital increases, in proportion to their shares. Similar to the provisions regarding JSCs, pre-emptive rights of the shareholders in LLCs can only be restricted or removed under the circumstances stated below:
(i) Just cause. The term "just cause" is also not defined for LLCs. However, the examples stated in the second paragraph of Article 591 are similar to the ones listed for JSCs. Such examples can be listed as: business acquisition, acquisition of subsidiaries, and employees' participation in the company.
(ii) Meeting quorum of at least two-thirds of the share capital and simple majority for decision quorum in the general assembly meeting. Article 591 refers to Article 621 which regulates special resolutions that require heavier quorum. Such quorum is consistent with the aim to preserve shareholders' share ratio in the company. No person will unjustly gain, benefit or incur losses as a result of the restriction or removal. The aim of this rule is to prevent structural changes within the company that would harm certain shareholders of the LLC and dilute their shares.
Contrary to the Former TCC, the TCC has extended the scope of regulations regarding pre-emptive rights and provided a framework to restrict shareholders' right to obtain additional shares in the company, thus creating an exception that requires stricter conditions.
This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in June 2019. A link to the full Legal Insight Quarterly may be found here
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