Turkish Commercial Code numbered 6102 ("TCC") regulates exceptions to the principle of free transfer of shares. Although certain exceptions are regulated under the TCC, these exceptions do not limit the transfer of shares as requested by the shareholders of joint stock companies. Thus, in practice, shareholders introduce other restrictive regulations regarding the transfer of shares under the shareholders agreement.
Shareholders Agreement
Every joint stock company has an articles of association, and the existence of an articles of association is a legal component for a joint stock company. A joint stock company cannot be established without an articles of association; however, the execution of a shareholders agreement is at the request of the shareholders. The shareholders agreement is not regulated by the law, and it is an anonymous, atypical type of agreement regulated on the basis of freedom of agreement. With the shareholders agreement, the parties regulate the exercise of the shareholding rights of the shareholders and the matters related to the administration of company.
The main purposes of the execution of shareholders agreement can be summarized as follows:
- Shareholders may wish to determine the structure and operations of the company and the rights of shareholders in advance through a shareholders agreement.
- It may be requested to strengthen the relation between the shareholders and the company, in cases where the personality or expertise of the shareholders are closely related to the company's field of activity. In such cases, shareholders are obliged to support and develop the company.
- The alienation of the company might be prevented. This situation generally occurs in family companies.
- In cases where the shares are not equally shared among the shareholders, it may be requested to create a balance of power. Some additional protection mechanisms may be provided to minority shareholders.
- If a new shareholder attended to the company, it may be requested to regulate the use of voting rights, the sharing of profits and how the shareholding dominance will be balanced between the shareholders.
Options and Similar Rights of Shareholders on Company Shares
For the purposes of the execution of shareholders agreement, shareholders entitle certain rights or options to each other. As a result of these rights and options, the company is prevented from being acquired by outsiders, competitors or other persons whose participation in the company is not requested, or the balance of power of the shareholders within the company is maintained. The options and similar rights of shareholders over company shares are as follows:
First Refusal or First Option Right
This is the situation where the shareholder who wishes to transfer the shares is required to offer the share transfer to the existing shareholders before transferring his/her shares to a third party. Other shareholders have a "first refusal" to purchase the shares compared to third parties. With this right, the shareholder who wishes to transfer his/her share may exit the company by transferring the shares, and the existing shareholders may not include the person they do not want to be a shareholder in the company. In this way, the composition of the shareholders' circle is preserved.
Pre-emption Right
The pre-emption right enables right-holder to purchase the shares of the shareholder who wishes to sell his/her shares to a third party with a unilateral declaration. The pre-emption right is a formative right. With a unilateral declaration, the holder of the pre-emption right obtains the opportunity to establish a purchase agreement with the shareholder who wishes to transfer his/her shares. However, in order to exercise this right, the shareholder shall want to sell his/her share to a third party; if this is not the case, the holder of the pre-emption right cannot exercise this right. When this condition for the exercise of the right is fulfilled and the holder of the pre-emption right delivers declaration of will to the other shareholder, the purchase agreement is established. In this way, the shareholder who wishes to transfer the shares shall transfer the shares to the shareholder who has used pre-emption right instead of third party.
Despite the existence of a pre-emption right regulated under shareholders agreement, if the shareholder who granted pre-emption right transfers the shares to a third party, the situation regarding the fate of the share transfer will come up. In the event of such situation, this transfer to the third party will be valid, and the pre-emption right holder will only be able to claim compensation for breach of obligation.
There are some essential points to be considered when granting pre-emption right to any shareholder under shareholders agreement. In cases where all shareholders mutually grant each other pre-emption right, it would be appropriate to decide how to specify the proportion of the shares subject to the pre-emption right that the entitled shareholders may acquire the shares subject to the pre-emption right, or whether another pre-emption right holder may also acquire these shares in case one of the pre-emption right holders does not exercise this right. In the event that the pre-emption right is granted to each shareholder without considering these issues, the minority shareholders may become dominant in the company. Therefore, in companies where the interests and balance of power between the shareholders are important, it would be appropriate to regulate the shareholders agreement considering such situations.
Call-Option Right
A call option is a right that grants shareholder the right to purchase all or part of the shares of the other shareholder at a predetermined price and obliges the other party to sell the shares at the same price. Even if the price of the shares is not predetermined, the method of determining the price may be regulated by the shareholders agreement, and it is obvious that if the price or the method of determining the price of the shares are not regulated under shareholders agreement and in case of exercising the call-option right, problems may arise between the shareholder parties of call-option right. The party to whom the right to call-option is granted has the right to purchase and transfer the shares with a unilateral declaration. Upon the receipt of the declaration of purchase by the other party, a sale agreement is established. The exercise of the call option under shareholders agreement may be subject to the fulfilment of certain conditions. These conditions may include blockage of the decision-making mechanism in the company and failure of the management. In this way, the setting of certain conditions will create a situation in favor of the shareholder granting the right to purchase.
In the exercise of pre-emption right, the contract is determinable since the contract will be concluded under the terms agreed with third party, but this is not the case with the call-option right. For this reason, the number of shares and the price, which are the essential components of the sale agreement to be established upon the exercise of the call-option right, shall be determined in advance.
The holder of the call-option right actually holds the right to squeeze-out the other party out of the company by purchasing the shares of the other party.
Put-Option Right
According to shareholders agreement put-option right, is an alternative which grants shareholder the right to sell all or part of the shares to other shareholders at a predetermined or determinable price and imposes an obligation on the other shareholders to purchase these shares at this price. A sale agreement is established if the party to whom the right to put-option is granted with its unilateral declaration regarding the sale of shares. The put-option right is an impressive right for minority shareholders in companies whose shares are not traded on the stock exchange. This is because it may be difficult for these shareholders to sell their shares because they have few shares in the company, and it may not be an attractive offer for the person who wants to buy the shares. In such a case, since it will not be possible for the minority shareholder to exit the company except for the transfer of the shares, this right may be granted to the minority shareholders by shareholders agreement.
Tag-Along Right
If a shareholder sells its shares to a third party, the tag-along right gives each shareholder to sell the amount of shares equal to the proportion of its shares to the third party under the same or better sales conditions. With the exercise of the tag-along right, the buyer purchases the shares not from a single shareholder, but from all shareholders who exercise this right.
The tag-along right is generally used to allow minority shareholders to leave the company in the event that the majority shareholder sells its shares and the control of the company changes and is applied to protect the rights of minority shareholders.
Drag-Along Right
With the drag-along right, the shareholder has the right to force the other shareholders to sell their shares to the buyer with the same sales conditions during the sale of their shares to the third party.
The drag-along right generally arise in cases where the company is acquired by another company or merged with another company. This right is exercised in cases where all of the company's shares are transferred, in order to obtain a higher selling price for the shares and to ease the sale of the shares.
Evaluation within the Framework of the Single Debt Principle
According to Article 480 of the TCC, other than the exceptions regulated by law, the articles of association shall not impose any obligation on the shareholder other than the payment of the share price or the premium over the nominal value of the share. This article states that the sole obligation of the shareholders of joint stock companies is to pay the capital they have committed. In the doctrine, this is referred as the principle of single debt.
Since the only obligation of the shareholders of joint stock companies is to pay the committed amount of capital, it is debatable in the doctrine what the status of these rights will be in the event that the rights mentioned above are regulated under articles of association. With the determination of these rights and options under articles of association, the only obligation of the shareholder will no longer be to pay the committed capital, and the shareholder will be under different obligations.
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.