Stock option plans (commonly referred to as Employee Stock Option Plans, or ESOPs) stand out as a tool designed to increase employee loyalty and motivation, while also enabling companies that may not have the means to offer competitive salaries to retain qualified talent within the organization. Stock option plans, which are widely used especially in the United States and Europe, have also been attracting growing interest in Türkiye. These plans are mostly implemented by publicly listed companies and startups, and with the continuous growth of the startup ecosystem, they are becoming an increasingly preferred practice.
1. Applicable Legislation
There is no specific legislation regulating stock option plans in Türkiye. However, various laws provide a legal framework for the implementation of such plans:
- Turkish Commercial Code No. 6102: It contains important provisions regarding the transfer of company shares, shareholder rights, and capital increases.
- Turkish Code of Obligations No. 6098: Option agreements and related undertaking gain legal validity within the framework of the Turkish Code of Obligations.
- Capital Markets Legislation: Due to publicly listed companies being subject to capital market regulations, stock option plans should comply with the regulations set by the Capital Markets Board.
- Labor Law No. 4857: Stock option plans are considered an additional benefit provided to employees under labor law, and as such, the employer has certain obligations.
2. Steps of Stock Option Plans
Stock option plans generally consist of specific stages. These stages are granting the shares, vesting the shares, and exercising the option.
- Granting the Shares: In this step, the company grants its employees the right to acquire shares under certain conditions, either for a fee or free of charge. Essentially, a specific group of employees is promised the opportunity to acquire company shares under certain conditions.
- Vesting the Shares: A vesting agreement is executed between the employee and the company, specifying the conditions under which the employee is entitled to acquire the shares. In practice, these conditions are typically based on the employee working for a specified period or meeting the company's performance criteria (Key Performance Indicators – KPIs).
- Exercising the Option: This is the step where the employee, who has met the conditions outlined in the vesting agreement and is entitled to the shares, exercises their option to acquire the shares.
3. Methods of Acquiring Shares
There are multiple methods for acquiring shares by an employee who gains stock option rights through a vesting agreement. The commonly used methods in practice are as follows:
- The Company's Undertaking to Transfer Its Own
Shares
Companies are allowed to acquire their own shares. A company that acquires its own shares can transfer these shares to its employees to fulfil its obligation. A key point to note in this method is that the company can only undertake 10% (ten percent) of its shares to employees. - Conditional Capital Increase
Another method of share acquisition for employees is conditional capital increase. For a conditional capital increase to be carried out, there should be a provision in the company's articles of association regarding this matter. In a conditional capital increase, the newly issued shares resulting from the capital increase are made available for acquisition by the company's employees. A key point to note in this method is that the pre-emptive rights of existing shareholders should be waived or restricted. Because, as a general rule, shareholders have the right to participate in capital increases and acquire shares. For employees to acquire shares through this method, the pre-emptive rights of the shareholders should be waived or restricted by a general assembly resolution. - Undertaking of Existing Shareholders
Without binding the company, existing shareholders may undertake to transfer shares to employees. In this method, a contractual relationship is formed between the employees and the shareholders through a share transfer undertaking agreement. Upon the employee exercising their option, the shareholders who have undertaken to transfer shares will be obligated to transfer the shares specified in the agreement to the employee. - Phantom Stock Option Plan
Instead of transferring ownership of shares to employees, certain economic benefits tied to the shares may be granted. In this method, known as a phantom stock option plan, employees do not directly own shares but receive financial benefits such as profit-sharing linked to the shares. As per this method, since employees do not directly own shares in the company, they are not entitled to benefits associated with share ownership, such as attending general meetings, voting rights, and other similar rights.
4. Taxation of Stock Option Plans
In Türkiye, there is no explicit regulation regarding the taxation of stock option plans. However, Income Tax Law No. 193 suggests that stock options may be classified as income and taxed as wages. In this context, stock options will also be subject to withholding tax. The calculation of the income will vary depending on whether the shares are provided free of charge or for a fee. If the shares are provided to the employee free of charge, the market value of the shares will be considered as income. If the shares are provided to the employee for a price lower than their market value, the difference between the market value of the shares and the amount paid by the employee will be considered as income. In the event of disputes arising from the implementation of stock option plans, it is appropriate to state that the provisions of the Labor Law No. 4857 will apply, as stock options are regarded as part of the employee's compensation.
5. Conclusion
The increasing adoption of stock option plans in Türkiye, inspired by global examples, is of great importance for companies, particularly in terms of retaining key employees and enhancing employee motivation. It is expected that stock option plans will be placed on a clearer legal framework in the future, providing a more comprehensive and well-defined set of rights and obligations for employees, companies, and shareholders.
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.
