Introduction
In this article, the preference shareholding concept, which is the practice of providing some shares with a superior right that is not granted to other shares or a new shareholding right that is not stipulated in the Turkish Commercial Code ("Law"), and the granting of liquidation preference shall be analysed.
What is a Preference Share?
Preference shares are regulated under Article 478 of the Turkish Commercial Code. The Law regulates that companies may grant privileges to certain shares, but the definition of preference shares is not included in the Law. In the second clause of the relevant article, it is stated that a preference is a superior right granted to a share in rights such as dividends, liquidation shares, preference and voting rights, or a new shareholding right not stipulated in the law.
Liquidation and Liquidation Share
In joint stock companies, companies shall enter into liquidation process in the event that one of the reasons for termination listed in the Law occurs such as expiration of the term realization or impossibility of realization of the subject matter of the business, and bankruptcy etc. Liquidation share refers to the amount to be distributed among each shareholder from the amount remaining after the payment of the company's debts and the return of the shareholders' capital they have contributed to the company.
Pursuant to Article 543 of the Law, if the articles of association of the company do not stipulate any shareholder to be entitled to a privilege in the liquidation preference or any other matter regarding the distribution of the liquidation shares, each shareholder shall be entitled to the liquidation share only in the ratio of the capital they have paid. Pursuant to the relevant article, after the debts of the company under liquidation are paid and the share amounts are returned, the remaining assets of the company in liquidation shall be distributed among the shareholders in the ratio of the capital they have paid and their preference rights, unless otherwise agreed in the articles of association. In case there is a liquidation preference in the liquidation share, the regulation in the articles of association shall be applied.
Liquidation Preference
Liquidation preference is an instrument regulated by the Law, which is generally granted to investors who later become a shareholder in joint stock companies, enabling the investor holding preferred shares to receive a certain amount before the founders or other shareholders in the event of the sale of the company or the occurrence of one of the liquidation events specified in the Law.
Article 478/2 of the Law regulating preference shares clearly states that companies are entitled to grant liquidation preference rights. Liquidation preference is not explicitly defined in the legislation, and the shareholders who are granted with liquidation preference are entitled to receive liquidation shares before and/or more than the other shareholders from the liquidation balance in the event that the company enters liquidation.
Pursuant to Article 478/1 of the Turkish Commercial Code, in order to grant a liquidation preference, the preference shall be specified in the articles of association of the company at the time of incorporation or the preference shall be regulated by amending the articles of association. If the company's initial articles of association do not stipulate a liquidation preference, aggravated quorum is required by the Law for the amendment of the articles of association. Article 421/3 of the Law stipulates that decisions on amendments of the articles of association regarding the issuance of preference shares shall be taken with the affirmative votes of the shareholders constituting at least 75% of the share capital. It should be noted that if this quorum is not reached in the first meeting, the same quorum is sought in the subsequent meetings.
Conclusion
Liquidation preference for shareholders in joint stock companies, as a right that is regulated under the Turkish Commercial Code and that may be granted exclusively to certain shares, may only be given to shareholders under the condition that it is stipulated in the articles of association of the company in advance.
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.
