A share certificate is a written instrument signed on behalf of a company, and serves as legal proof of ownership of the number of shares indicated. Within the framework of the Turkish Commercial Code, companies are not legally obligated to issue share certificates. However, in practice, share certificates are issued mostly to gain corporate tax and value added tax advantages. Bearer temporary share certificates may be issued in lieu of bearer share certificates and such bearer temporary share certificates will remain valid until the issuance of bearer share certificates. Holders of bearer temporary share certificates enjoy all ownership rights associated with the shares such certificates represent. Principles set forth for bearer share certificates are mostly preserved within the framework of the New Turkish Commercial Code with some significant amendments and developments.
Pursuant to Article 409 of Turkish Commercial Code no. 6762 ("TCC"), shares of a joint stock company shall be registered or to bearer. Under the TCC, companies do not have a legal obligation to issue share certificates, however they may find it convenient to do so for the purpose of easing the transferability of shares and gaining corporate tax and value added tax advantages. Article 570 of the TCC defines bearer share certificate as a share certificate the substance or form of which indicates that the bearer of the share certificate is the legal owner of such share certificate. Bearer share certificates are issued in the form set out in Article 413 of the TCC. Pursuant to Article 413/1 of the TCC, share certificates shall indicate the trade name, the amount of the capital and the date of registration of the company and the kind and nominal value of the share and shall be signed by at least two (2) persons authorized to sign on behalf of the company. The signature may be set in the form of a stamp or seal or it may be printed. As implied from the definition stated above, one of the most unique characteristics of bearer share certificates is that such share certificates do not indicate the name of the holder of the certificate.
Another important characteristic of bearer share certificates is their method of transfer. Pursuant to Article 415 of Turkish Commercial Code, bearer temporary share certificates shall be transferred only by delivery of such certificate. This ease of circulation is unique to bearer share certificates and bearer share certificates are mostly preferred for this reason.
Bearer temporary share certificates may be issued as a substitute for bearer share certificates in the event that the company does not issue share certificates representing the shares. Bearer temporary share certificates shall be issued in the same form as bearer share certificates and issuance of such certificates shall be subject to fulfillment of the same conditions set out for issuance of bearer share certificates. Bearer temporary share certificates issued as a substitute for bearer share certificates shall be replaced with bearer share certificates once the company issues such share certificates. Upon issuance of bearer share certificates, temporary bearer share certificates issued as a substitute for such certificates shall be null and void. It should be borne in mind that in the event the company delivers the newly issued bearer share certificates without taking back bearer temporary share certificates, the board of directors shall be responsible for any loss incurred resulting from such wrongdoing. The holder of a bearer temporary share certificate may exercise all rights associated with the ownership of shares represented by such share certificate such as, inter alia, voting rights, the right to receive dividends and preemptive rights to purchase newly issued shares.
Conditions for Issuance of Bearer Temporary Share Certificates
As mentioned above, issuance of bearer temporary share certificates shall be subject to the same conditions set forth for issuance of bearer share certificates under the TCC. First of all, in order to issue bearer share certificates, issuance of such certificates has to be envisaged in the articles of association of the company. This requirement is inferred from Article 409 of the TCC, which states that in the absence of any provision to the contrary in the articles of association of the company, share certificates shall be registered. Secondly, since share certificates, either registered or to bearer, issued before the company is registered with the Trade Registry are null and void under Article 412 of the TCC, bearer share certificates may be issued only after the registration of the company with Trade Registry is complete. Last but not least, it should be noted that although the capital sum of the company determined in the articles of association does not have to be paid in full at the time of incorporation, pursuant to Regulation no. 2003/3 issued by the Ministry of Industry and Commerce, bearer share certificates may not be issued unless capital contribution corresponding to such shares is paid in full.
Exercise of Voting Rights in the General Assembly by the Holder of Bearer Temporary Share Certificates
As stated above, holders of bearer temporary share certificates shall enjoy all ownership rights that holders of bearer share certificates enjoy. Pursuant to Article 360/2 of the Turkish Commercial Code, shareholders may exercise their voting rights in person during general assembly meetings and they also may exercise their voting rights through a third party, who does not have to be a shareholder unless otherwise provided for in the articles of association of the company. Holders of bearer temporary share certificates should entrust their certificates to the company one (1) week prior to the date of the general assembly meeting in exchange for entrance cards in order to vote at the general assembly in person under Article 360/3 of the TCC. In order to exercise voting rights related to bearer temporary share certificates by proxy, entrance cards to be given in exchange for the entrustment of such certificates to the company must indicate the name and status of the representative. It should be noted that a document evidencing proxy is required to place the name of the representative on the entrance card.
Pledge on Bearer Temporary Share Certificates
Pursuant to Article 956 of the Turkish Civil Code, a bearer share certificate may be pledged by delivery of the certificate to the pledgee. In the event that bearer temporary share certificates are pledged by delivery to the pledgee, ownership rights related to the shares represented by such certificates, such as voting rights, the right to receive dividends and preemptive rights to purchase newly issued shares will remain with the legal owner of the shares. Pursuant to Article 360/3 of the TCC, voting rights associated with the shares may be exercised by the pledgee only if a proxy is granted to such pledgee in a separate document.
Grant of Usufruct Right on Bearer Temporary Share Certificates
In the event that a usufruct right is granted upon a bearer temporary share certificate, such share certificate shall be delivered to the holder of the usufruct right or entrusted to a secure place, such as a bank under the name of the holder of the usufruct right. The holder of the usufruct right shall be entitled to receive dividends during the term that such usufruct right is in effect. The holder of usufruct right is entitled to vote at general assembly meetings unless otherwise provided for in the articles of association or stipulated in an agreement concluded between the shareholder and usufruct right holder. However the holder of the usufruct right should observe the interests of the shareholder while exercising voting rights at the general assembly and should not exercise such voting rights to the detriment of the shareholder.
Regulation Set Forth in the New Turkish Commercial Code for Bearer Temporary Share Certificates
Bearer share certificates are also regulated in Turkish Commercial Code no. 6102 ("New TCC") in several articles. Although the current system set forth for bearer share certificates in the TCC is mostly preserved in the New TCC, the New TCC includes some significant amendments to the current system, especially in terms of issuance of bearer share certificates and temporary bearer share certificates and exercise of voting rights associated with bearer shares.
The New TCC preserves the definition (Article 487), form (Article 487) and method of transfer of bearer share certificates (Article 489) and envisages the same requirements set forth for the issuance of such in the TCC (Articles 484 and 486) with some differences. First of all, the New TCC does not explicitly state that the shares of a company shall be registered unless otherwise provided for in the articles of association. It should be noted that the exclusion of this provision in the New TCC is considered a significant gap in the New TCC, therefore it is recommended to the companies being incorporated under the New TCC to include a provision allowing issuance of such shares as a precaution.
The New TCC also imposes a new legal obligation on joint stock companies the shares of which are to bearer. Pursuant to Article 486 of the New TCC, in the event that the shares are to bearer, the board of directors has to issue bearer share certificates within three (3) months of the capital contribution corresponding to such shares being paid in full. In addition, the board of directors is also obligated to announce the issuance of such share certificates and register the board resolution taken for the issuance of such certificates with the Trade Registry. As mentioned above, within the current system of the TCC, joint stock companies are not obligated to issue share certificates either registered or to bearer even though capital contribution corresponding to such shares is paid in full therefore the obligation imposed on board of directors to issue share certificates for bearer shares can be accepted as a significant amendment to the current system. It should be borne in mind that, even though not explicitly provided for in the TCC, today in practice board decisions taken for issuance of bearer share certificates are announced in accordance with the procedures set forth in the articles of association of the company and registered with the Trade Registry. Therefore it can be concluded that obligation imposed on board of directors regarding registration of board resolutions taken for issuance of share certificates with the Trade Registry reflects the common business practice.
Article 486/2 of the New TCC also regulates issuance of temporary share certificates and states that temporary share certificates may be issued for a period of three (3) months until the company issues bearer share certificates. Therefore within the framework of the New TCC, temporary share certificates may only be issued as a substitute for bearer share certificates for a period of three (3) months and at the end of such period such temporary certificates need to be replaced with bearer share certificates. Article 486/2 also sets forth that provisions applicable to registered shares shall be applied to such temporary share certificates. This means that temporary share certificates shall bear the name of their owner, shall be registered with the share ledger of the company and shall be transferred by virtue of endorsement and delivery without regard the kind of shares they are substituting. From this provision, it can be inferred that the concept of temporary bearer share certificates is ruled out within the framework of the New TCC. For this reason, this regulation can be considered a significant amendment to the current system.
Pursuant to Article 425 of the New TCC, shareholders may exercise their voting rights in person during general assembly meetings and they also may exercise their voting rights through a third party who may but is not required to be a shareholder of the company. It should be noted that the New TCC expressly declares provisions in the articles of association requiring representatives to be shareholders null and void, which means voting rights may also be exercised through a third person who is not a shareholder even though the articles of association of the company provides otherwise. In addition, the New TCC imposes an obligation on representatives to comply with the instructions of the shareholder while exercising voting rights. Although noncompliance with the instructions shall not render the vote invalid, it is important to point out that such obligation is not articulated within the system of the TCC. Pursuant to Article 415/3 of the New TCC, holders of bearer temporary share certificates should receive their entrance cards by proving possession of shares at least one (1) day prior to the date of the general assembly meeting in order to vote at the general assembly in person. It is important to point out that the New TCC expressly prohibits provisions requiring share certificates to be deposited with the company or any other institution in order to attend the general assembly and exercise voting rights. This prohibition can also be considered a significant amendment to the current system set forth for participation in general assembly meetings and exercise of voting rights at general assembly meetings.
It should be noted that provisions regulating the pledge of share certificates and grant of usufruct right upon the shares and rights of the pledgee or usufruct right holder are reserved in the New TCC.
Conclusion
In conclusion, under the TCC, a joint stock company may issue share certificates to represent the capital of the company. Joint stock companies may issue temporary share certificates as a substitute for share certificates. Holders of such temporary share certificates shall enjoy all the ownership rights associated with the shares represented by such certificates. However, within the framework of the New TCC, temporary share certificates are subject to provisions regulating registered shares and new obligations are imposed on joint stock companies, such as the obligation to issue bearer share certificates within three (3) months of payment of the capital contribution corresponding to the bearer shares which will be represented by such share certificates. Therefore it can be concluded that the concept of bearer temporary share certificates has significantly changed within the system set forth by the New TCC.
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.
