Usufruct Right on Limited Liability Company Shares
The principles regarding usufruct rights are governed by Turkish Civil Code numbered 4721 ("Civil Code"). Pursuant to Article 794 of the Civil Code, a usufruct right may be established over movables, immovables, rights, or an estate. Unless otherwise stipulated, this right entitles its holder to full enjoyment of the subject matter. Full enjoyment includes possession, use, and deriving benefits from the asset, right, or estate subject to the usufruct. According to Article 795 of the Civil Code, a usufruct right is established through the transfer of possession for movables, assignment for receivables, and registration with the land registry for immovables. The usufruct right terminates upon the death of the holder in the case of natural persons, and upon the expiration of the agreed term or dissolution in the case of legal entities. For legal persons, the maximum term of a usufruct right is 100 years.
A usufruct right is considered a personal servitude and is one of the most comprehensive limited real rights following ownership. The holder of a usufruct right is entitled to possess, manage, use, and derive income from the asset, and shall exercise these rights with the diligence of a prudent administrator. As a personal right, it cannot be transferred, pledged, or inherited. The usufruct right encompasses all economic benefits of the subject right, while the bare ownership remains with the owner, who retains only the right to dispose of the subject matter.
The establishment of a usufruct right on shares in a limited liability company is governed by Article 600 of the Turkish Commercial Code numbered 6102 ("TCC"). According to Article 600 of TCC, the provisions regarding the transfer of a share shall apply to the establishment of a usufruct right over that share. Therefore, the requirements under Article 595 of the TCC for share transfers shall also apply to the establishment of a usufruct right. In this context, a written agreement shall be executed and the signatures of the parties shall be notarized. Furthermore, the approval of the general assembly is a condition for the validity of the usufruct right; without such approval, the right cannot be established. The general assembly may reject the establishment of a usufruct right on company shares without providing any justification. Pursuant to Article 595/4 of the TCC, the articles of association may prohibit the establishment of a usufruct right on company shares. In accordance with Article 594 of the TCC, a usufruct right established on a limited company share shall be recorded in the share ledger.
In limited liability companies, shareholder rights are generally classified into financial rights and managerial rights. Where a usufruct right is established on a share, it is accepted that both the financial and managerial rights associated with the share belong to the usufructuary. The right to dividends is one of the primary financial rights arising from shareholding. Since the usufruct is a limited real right that provides the authority to benefit from the subject, the right to dividends accrued during the term of the usufruct is also deemed to fall within the scope of this right. Article 600/3 of the TCC clearly reflects that the usufruct right also includes managerial rights. According to the relevant provision, "If a usufruct right exists over a share, the share shall be represented by the usufructuary; in such case, if the usufructuary fails to observe the interests of the shareholder in good faith, he or she shall be liable to pay compensation." Accordingly, the usufructuary is also entitled to exercise voting rights, but only within the term of the usufruct.
Pledge of Limited Liability Company Shares
A pledge established over a share in a limited liability company covers the financial rights attached to the shareholder status. In this respect, a pledge over a limited liability company share constitutes a limited real right that arises not from ownership but from shareholding. Establishing a pledge over company shares does not grant the pledgee the status of a shareholder. Therefore, the pledgee, who is not a shareholder, cannot exercise shareholder rights in the company. The only right the pledgee holds is to satisfy the secured claim through the liquidation of the pledged shares.
The pledge over shares in a limited liability company is subject to the provisions of Articles 954 to 961 of the Civil Code concerning pledges over receivables and other rights. In addition, Article 600/2 of the TCC contains a specific provision regarding the pledge of shares in a limited liability company. According to this provision, "The articles of association may stipulate that the establishment of a pledge over a share is subject to the approval of the general assembly. In such case, the provisions relating to share transfers shall apply. The general assembly may refuse to grant approval for the establishment of a pledge only for just cause."
In order for a pledge to be established on limited liability company shares, there must be no prohibition on transfer or pledge of shares. If there is a statutory or contractual restriction on the transfer of shares, then pledging those shares is not possible. Pursuant to Article 954 of the Civil Code, only assignable receivables and rights can be pledged. Accordingly, if a restriction exists on the transfer of the shares, pledging them is also prohibited. The articles of association may prohibit the transfer of shares; in such cases, a pledge over such shares cannot be established.
Under Article 955 of the Civil Code, to establish a pledge on a company share, a written pledge agreement shall be executed and the conditions for the transfer of the pledged right shall be fulfilled. Pursuant to Article 595 of the TCC, the transfer of a limited company share requires a written agreement and notarization of the parties' signatures. The written form and notarized signatures are valid conditions for the pledge agreement.
According to Article 600/2 of the TCC, the articles of association may require general assembly approval for the establishment of a pledge over shares, in which case the provisions concerning share transfers shall apply. Article 616/2(c) of the TCC provides that, if stipulated in the articles of association, the granting of approval for the pledge of shares is a non-transferable power of the general assembly. The general assembly may not reject the application for approval unless there are justifiable reasons. The law and the article preamble do not specify what constitutes a just cause. However, the articles of association may explicitly define the circumstances that qualify as just cause, thereby eliminating any ambiguity. Such reasons may be company-specific or related to the shareholders. Furthermore, if the general assembly does not reject the application for approval of the pledge within three months from the date of application, the pledge shall be deemed approved.
The establishment of a pledge over a limited liability company share shall also be recorded in the share ledger. Such registration is declaratory, not constitutive.
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.
