Recruiting talented team members is more than an issue nowadays in particular for tech companies. With an increase in employee stock option grants around the world, stock option planning has been essential to success in most companies to attract highly skilled employees. While there are no specific regulations addressing the stock option planning in Turkey, it is worth mentioning the current legislation within the Turkish Commercial Code1 (the “TCC”) from the practical points of view.2

What are Turkish law considerations for Private Corporations?

There are no specific provisions in the Turkish Commercial Code as to the granting stock options, however there are some provisions that are related to the employee stock options.

Depending on the company's stock option policy, the employees to be granted restricted stock units may include full-time, part-time employees, the outsource service providers and group companies' employees. It is also stipulated by some scholars that board members working through employment agreements can also be included into stock option planning.3

The companies can either i. acquire its own shares of the company under the provisions of the TCC, ii. increase its shares to give its employees or iii. give its shareholders' shares to employees. Although first two mechanisms are quite commonly preferred, the third option might be considered for the companies to give its shares in its founding round. Within this article, we would like to summarize first two mechanisms.

First Mechanism : The Company's Acquisition of its Own Shares

The company wishing to grant its employees stock options may consider acquiring its own shares within the limitation of the Turkish Commercial Code. In this situation, either the current shareholders will transfer its current shares to the company or the company will increase its capital and reallocate the newly issued shares representing the 10% of the companies to the company.

With the amendments to be made in the articles of association, the board of directors will have the authority to transfer the companies' shares representing up to 10 % of the total shares of the company. While it is not possible to, under the Article 380 of the TCC, grant an advance, a loan or security of the company, the Article 380 of the TCC provides an exemption for stock option planning. Although some scholars are in favor of increasing the 10 % limitation to 20 %, the current legislation only provides 10% as the upper limit.4

Second Mechanism : The Company's Capital Increase

Apart from the acquisition of its own shares, another way for the company to grant stocks to the employees is to increase the capital in certain periods to be determined by the company, and to make stock option planning for the employees with the capital increase. The shareholders in regular capital increase procedure have the pre-emptive rights as to capital increase and are granted to subscribe into the shares. However, the provisions of the TCC provides exemption for capital increase to be carried out for the purposes of giving the shares to employees. The dilution of the current shareholders' shares should be taken into consideration while companies opting for this option.

What should be the key considerations in stock option planning?

  1. Whether to grant the shareholders rights such as dividend rights, voting rights or any other rights on the shares to be granted to the employees,

  2. The circumstances of the stocks to be given to the employees in case the employees leave the job or does not complete its vesting schedule,
  3. Whether any transfer restriction shall be subject to the shares to be given to the employees to third parties,
  4. Employees in the same position should be given the same rights while granting stock options. Under Turkish employment regulations, the equality among the employees in the same position is required. In this context, the objective determination of performance and similar determinations will prevent lawsuits that may be filed by employees who are not given share options to the company,
  5. Pricing of the company's share is important from the tax points of view although there is no need to insert the stock pricing into stock unit planning, and
  6. Whether shares will be repurchased by the company in case the company does not carry out a public offering or any investment rounds.

Footnotes

1 Turkish Commercial Code, numbered 6102, published in the Official Gazette dated 14.02.2011

2 The provisions of capital markets legislation shall be taken into consideration for companies subject to the provisions of the Capital Markets Law numbered 6362, published in the Official Gazette dated 30.12.2012

3 Doğan Yenisey, K., Anonim Şirket Yönetim Kurulu Üyesi ve İş Sözleşmesi, İstanbul Üniversitesi Hukuk Fakültesi Mecmuası, 2016, C. 74, Özel S., Prof Dr. Fevzi Şahlanan'a Armağan C.1, p. 32

4 Baş, Kadir, Çalışanların Pay Sahipliği Yoluyla Anonim Şirketlere Katılımı, Beta, 2021, p.114

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.