The death of a company partner gives rise to significant consequences not only under inheritance law but also under company law. As the company shares held by the deceased partner pass to the heirs, various legal issues arise, such as when the heirs acquire their status as partners, whether they may attend general meetings, how they will exercise their voting and dividend rights, and whether the company may interfere with the heirs’ partnership.
The rules applicable to public limited companies and private limited companies differ in these respects. In particular, whilst Article 596 of the Turkish Commercial Code (“TCC”) introduces a special provision regarding the transfer of shares by inheritance in private limited companies, in public limited companies the nature of the shares and, in particular, the provisions relating to registered shares are of significance.
- Transfer of Shares by Inheritance in Limited Companies
The transfer of shares by inheritance in limited companies is specifically regulated under Article 596 of the TCC. Accordingly, where a share in the authorised capital is transferred by inheritance, the division of an estate, the matrimonial property regime between spouses, or through enforcement proceedings, all rights and obligations pass to the person acquiring the share at the time of transfer, without the need for the general meeting’s approval.Consequently, in the event of the death of a limited company partner, the general meeting need not give separate approval for the heirs to acquire partner status. In this respect, transfer by inheritance differs from the voluntary transfer of a share.
Entry in the share register or registration in the commercial register is not of a constitutive nature with regard to the acquisition of partner status, but serves a declaratory and informative function regarding the existing legal situation. Consequently, the heirs’ status as partners arises at the time of death, independently of any registration procedures with the company.
However, the legislator has granted the company a special option, taking into account the changes that may occur in the partnership structure of a limited company. Pursuant to Article 596(2) of the Turkish Commercial Code, the company may, within three months of becoming aware of the transfer of a share by inheritance, refuse to approve the person to whom the share has been transferred. In such a case, the company may propose to acquire the shares at their fair value on its own behalf, on behalf of its shareholders, or on behalf of third parties. Should the company exercise this right, the acquisition of the shares at their fair value comes into effect, and the heir’s status as a shareholder ceases in accordance with the consequences provided for by law.
This provision is not an ‘approval’ mechanism whereby the company decides whether or not to accept the heir as a partner from the outset. The share passes to the heir at the time of death; however, the company may bring about the termination of the heir’s status as a partner by offering to acquire the share in accordance with the conditions laid down by law.
Where there are multiple heirs, it is a matter of debate as to whether the company may accept only some of the heirs as partners whilst rejecting others. According to the Supreme Court’s evolving approach, as the heirs hold joint title to the share until the estate is distributed, it is not possible for the company to automatically divide the share amongst the heirs and thereby accept some whilst rejecting others.
Even if the company’s articles of association contain specific provisions regarding succession by inheritance, it does not appear possible to make a decision on partial acceptance or rejection based on these provisions before the estate has been distributed. Consequently, if the company wishes to terminate the partnership of heirs it does not wish to accept, it must exercise its right of purchase in respect of the entire share under Article 596 of the Turkish Commercial Code.
The company’s rejection of the transfer of the share by inheritance takes effect not from the date the decision is made, but from the date the share passes to the heir. However, general meeting proceedings and decisions taken prior to the adoption of the rejection decision are not affected by this situation. If the company fails to express a clear and written intention to reject the transfer of the share within three months of becoming aware of the transfer, it is deemed to have consented to the transfer of the share.
The exception to the automatic acquisition of shareholder status by heirs is the renunciation of the inheritance. Pursuant to Article 606 of the Turkish Civil Code, heirs may renounce the inheritance within three months of the date on which they learn of the testator’s death. In the event of a renunciation of the inheritance, the heir is deemed not to have acquired the status of heir from the moment of death, and consequently, the status of partner in respect of the company share does not arise. If the inheritance is not renounced, or if any explicit or implicit acts indicating acceptance of the inheritance are carried out, this possibility ceases to exist. However, even in such a case, the company’s right of pre-emption under Article 596(2) of the Turkish Commercial Code remains reserved.
On the other hand, in the case of succession by inheritance, the transfer restrictions and contextual provisions in the company’s articles of association that apply to voluntary transfers do not, as a rule, apply. Similarly, the security requirement that may arise in voluntary transfers under Article 595 of the Turkish Commercial Code cannot be imposed in the case of transfer by inheritance. Thus, the legislator has regulated the transfer of shares by inheritance as a transfer arising directly from the law, independent of a transfer transaction based on the parties’ will.
- Shareholders’ Rights in Limited Companies
Upon the death of a partner in a limited company, in accordance with Article 596(1) of the Turkish Commercial Code, all rights and obligations attached to the share pass to the heirs without the need for any general meeting approval. In this respect, in limited companies, no distinction is made between property rights and management rights in terms of succession by inheritance. Consequently, in addition to economic rights such as profit shares and liquidation shares, partnership rights such as the right to attend general meetings and to vote are also automatically acquired by the heirs.
Conversely, rights granted personally to the deceased and linked not to the shareholding but directly to the partner’s person cannot, by their very nature, pass automatically to the heirs. For this reason, it is important to assess whether the right stems from shareholding or from the partner’s person.
As a natural consequence of the heirs acquiring the right to attend and vote at general meetings, notices of general meetings must also be served on the heirs in accordance with the prescribed procedure. General meeting proceedings conducted without taking the heirs’ attendance into account may, depending on the specific circumstances of the case, raise issues regarding the validity of the general meeting’s resolutions. In particular, as the condition for a general meeting convened without prior notice is that all partners must be present and no objection must be raised to the meeting, it is not possible to apply this procedure in the absence of the heirs.
- Exercise of Partnership Rights by Heirs
Where there are multiple heirs, a joint ownership of the estate arises upon the opening of the succession. Pursuant to Articles 640 and 702 of the Turkish Civil Code, the heirs hold joint rights over the assets forming part of the estate until the estate is divided. With regard to the share capital of a limited company, however, a period of Supreme Court practice held that each heir acquired the deceased’s share directly and independently in proportion to their own inheritance share.
However, it is evident from the Supreme Court’s more recent decisions that this approach has been abandoned and an assessment in line with the general principles of inheritance law has been adopted. Accordingly, unless the estate has been divided or the joint ownership has been converted into shared ownership, none of the heirs holds an independent title to the limited company share; the heirs hold joint title to the entire share. Consequently, no single heir may dispose of the share unilaterally without the participation of the other heirs or the provision of the necessary representation mechanism.
Joint tenancy ceases upon the division of the estate. If, as a result of the division, the entire share of the authorised capital is bequeathed to one of the heirs, the rights and obligations arising from that share also vest in that heir. Where the heirs transition to co-ownership, the legal status of the share is determined accordingly. Consequently, in cases where a limited company share passes to more than one heir, it is more consistent with the current approach of the Court of Cassation to recognise that joint ownership of the share continues until the estate is divided, rather than assuming that the share is automatically divided amongst the heirs in proportion to their respective shares of the inheritance.
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.
