Joint stock companies, one of the companies regulated as capital companies under the Turkish Commercial Code, are commercial companies with relatively large capitals. These companies, whose capital is definite and divided into shares, may issue share certificates, also known as share certificates, to represent the shares of the capital. If share certificates are issued for the shares of the company, the transfer of shares is possible through the duly transfer of these certificates.
Promissory notes issued to represent the shares of joint stock companies are a type of negotiable instrument. Like other negotiable instruments, they may be issued in registered or bearer form. Article 484 of the Turkish Commercial Code clearly states that "Share certificates may be bearer or registered." It is at the company's discretion to issue share certificates in registered or bearer form. However, there is a limitation on bearer share certificates. This limitation is that bearer share certificates may not be issued for shares for which the consideration has not been paid in full or in part. If bearer share certificates are issued for shares for which the price has not been paid in full, the share certificate will face the sanction of invalidity and third parties will be required to compensate the damages incurred due to this reason.
Our Commercial Code adopts the principle that the shares of joint stock companies may be transferred without any restriction. However, the exceptions to this rule introduced by law and company agreements complicate the issue. In practice, there are hesitations on how to transfer shares of joint stock companies and how to transfer share certificates in a valid manner. For the aforementioned reasons, in this bulletin, we have focused on how shares of a joint stock company can be transferred with or without a share certificate, the exercise of shareholding rights of the company after the transfer, and the obstacles to the transfer by the company.
1. Transfer of Shares of Joint Stock Company with Bearer Shares
If no share certificates have been issued for the shares in a joint stock company, the issue of how to transfer the shares without share certificates should be examined according to whether the share is linked to the dematerialized system or not. Pursuant to Article 13 of the Capital Markets Law, "It is essential that capital market instruments are issued in dematerialized form in electronic media without being tied to a promissory note." The purpose of this system is to identify the shareholders through the records kept in electronic environment and to realize the share transfers through the changes to be made in these records. The date of notification to the Central Registry Agency will be taken as the date of transfer. In the transfer of these shares, which are linked to the dematerialized system, the parties must first enter into a written agreement, which is legally deemed as a transfer of receivables. Following this agreement between the transferor and the transferee, the transfer must be notified to the central registry institution and registered as the new owner of the share.
If the shares of a joint stock company are not linked to share certificates and the shares are not linked to the dematerialized system, the issue of how to transfer the shares varies depending on whether the share price has been paid in full or not. If the consideration for the share has been paid in full to the company, the transfer of the share must be made in accordance with the provisions of the transfer of receivables of the Code of Obligations. According to Article 183 of the Turkish Code of Obligations, the transfer of the receivable must be made by a written agreement. Otherwise, the transfer will be legally invalid. Therefore, the shareholder of the company may transfer a fully paid share to the person who wants to take over the share with a written agreement.
If the price of the company share to be transferred has not been paid in full, this share must be transferred according to the transfer of debt and transfer of receivables procedure stipulated in the Code of Obligations. In the transfer of the debt, the legislator recognizes that the debtor's solvency and identity are important for the creditor, and therefore requires the creditor's consent to the transfer of the debt to another person. Since the creditor of the company share price is the legal entity of the company, if a company share that has not yet been fully paid is to be transferred, this transfer must be approved by the company. In short, it is possible to transfer an unpaid share with a written transfer agreement between the parties and the decision of the board of directors of the company. Finally, pursuant to Article 499 of the Turkish Commercial Code, the transfer of an unregistered share must also be recorded in the share ledger. For this purpose, the transferee must apply to the board of directors of the company. Registration in the share ledger is necessary to prove share ownership against the company and to exercise shareholding rights.
For more detailed information on assignment of receivables and transfer of debts, you can visit other content on our website via the links below;
https://www.solmazlaw.com/en/transfer-of-the-debt-to-another-person/
https://www.solmazlaw.com/en/transfer-of-debts-and-liability-for-debts-in-commercial-business-transfer/
2. Transfer of Bearer Joint Stock Company Share Certificates
A different procedure has been envisaged with a recent amendment to the law regarding the transfer of bearer shares in joint stock companies. According to the amendment to Article 489 of the Turkish Commercial Code by the Law No. 7262 published in the Official Gazette dated 31.12.2020 and numbered 31351, the transfer of bearer shares of joint stock companies is not only possible through the transfer of possession, i.e. the physical transfer of the share certificate itself. At the same time, a notification must be made to the central registry institution by the person who transfers the share. Otherwise, the holder of a bearer share certificate cannot exercise his rights arising from the share.
The provision of the Turkish Commercial Code regarding the transfer of shares in bearer joint stock companies is as follows
"The transfer of bearer share certificates shall become effective for the company and third parties only with the notification to be made to the Central Registry Agency by the transferee of the share by transferring the possession. In the event that the Central Registry Agency is not notified, the holders of bearer share certificates may not exercise their rights arising from this Law until the necessary notification is made.
In asserting the rights attached to bearer share certificates against the company and third parties, the date of notification made to the Central Registry Agency shall be taken as basis."
In case of failure to make the aforementioned notification, administrative fines are imposed on both the board of directors of the joint stock company and the transferee of the shares. Therefore, in the new system, it is necessary to notify the central registry Agency of the share transfer in order to avoid paying administrative fines and to exercise the rights related to the share (arising from the share), such as participating in the general assembly and voting. The condition for the share transfer to be asserted both against the company and third parties is to notify the central registry institution. For example, with the amendment made to paragraph 3 of Article 18 regulating the conditions for bearer share certificate holders to attend the general assembly meeting, the procedure for shareholders to obtain an entrance card has been abolished, and it is stipulated that bearer share certificate holders whose names or titles are included in the shareholders' schedule provided from the Central Registry Agency (MERSIS) and who prove to the board of directors that they are in possession of the bearer share certificate before signing the list of those who can attend the general assembly meeting may attend the general assembly meeting. As can be seen, the records kept by the central registry institution are now taken as basis for share ownership.
In summary, as a rule, for the transfer of a joint stock company share tied to a bearer share certificate, both the physical delivery of the certificate to the transferee and the transfer of the possession of the certificate to him and the notification to the central registry institution are required. In addition to this procedure, there is no obstacle to a written agreement between the parties for the transfer.
3. Transfer of Registered Joint Stock Company Shares
Joint stock companies may decide to issue registered share certificates instead of bearer share certificates. Registered share certificates must state the company's trade name, capital, date of incorporation, share certificate type and date of registration, the type and nominal value of the share certificate, the number of shares the share certificate contains, the name and surname or trade name of the holders, their place of residence, and the amount of the share certificate price paid. It is also stipulated that these share certificates must also be registered in the share ledger of the company.
Pursuant to Article 486 of the Turkish Commercial Code, if the minority shareholders so request, registered share certificates shall be printed and distributed to all holders of registered share certificates. Minority here means shareholders holding at least one tenth of the company's share capital.
It is also possible to transfer shares of a joint stock company that are attached to registered shares. The Law permits the transfer of registered shares without any restrictions. It is possible to add a provision to the articles of association of registered shares to limit the transfer of shares only with the approval of the company. Apart from this, there are also limitations arising from the law regarding the transfer of registered shares. According to Article 491 of the Turkish Commercial Code, registered shares that have not been fully paid for may be transferred only with the approval of the company. Unless the company gives its approval, a partially paid share cannot be transferred. However, the company may refuse to give its approval only if the transferee's ability to pay is doubtful and the collateral required by the company has not been provided.
The transfer of registered share certificates through a legal transaction may be made by transferring the possession of the endorsed registered share certificate to the transferee. The transfer of possession means the actual delivery of the share certificate to the transferee. The endorsement process is realized by making a full endorsement on the back of the share certificate, indicating the name of the person to whom the share certificate is endorsed, the transfer will and the signature of the transferor. In order to transfer the shares of a joint stock company attached to a registered share certificate, both the full endorsement and the possession (physical delivery) of the share certificate must be ensured. It is not possible to transfer the shares of a joint stock company only with the transfer will written on another paper. This is because the rights attached to share certificates, which are a type of negotiable instrument, cannot be transferred and asserted separately from the share certificate. Although physical delivery is not provided, it is necessary to reserve the cases where possession is accepted to be transferred without delivery in the Civil Code.
Although registered joint stock company shares may be transferred by transfer of possession and endorsement, there is one more procedure that must be completed in order to assert the transfer against the company and to exercise the rights arising from the partnership. This is the application to be made to the board of directors of the company for the transfer of shares to be recorded in the share ledger. The assertion of the share transfer against the company is possible with the decision of the board of directors and the registration of the transfer in the share ledger of the company. Otherwise, the person who is not registered in the share ledger but transfers the shares will not be able to exercise his/her rights arising from the partnership. Because in this case, he/she cannot prove that he/she is a shareholder against the company, and therefore, he/she cannot use the rights provided to him/her by the share he/she has acquired, such as attending the general assembly and voting. If the company refuses to register the share transfer in the share ledger, it is possible to ensure that the transfer is registered in the share ledger without the need for a resolution of the board of directors through a performance lawsuit.
Although these are the general principles regarding the transfer of registered shares of joint stock companies, it is also necessary to make a distinction according to whether the joint stock company is listed on the stock exchange or not. This is because, according to this distinction, the conditions for the company's approval or disapproval of the transfer of registered shares vary according to the provisions to be included in its articles of association.
3.1. Registered Shares Not Listed on the Stock Exchange (in Not Listed Joint Stock Companies)
Joint stock companies whose shares are not listed on the stock exchange (closed to the public) are generally family-owned companies. Therefore, the identity of the shareholders is important in such companies. In order to prevent the transfer of shares outside the family or the purchase of shares by outsiders, even if the company is not a family business, the articles of association of the company may stipulate restrictive provisions for the transfer of shares. This is a measure to protect the shareholders and the company and to prevent the unwanted transfer of shares. Considering the aforementioned situation of unlisted joint stock companies, the legislator has regulated the circumstances in which the company may refuse to approve the transfer of shares and the provisions of the transfer differently from the public joint stock companies. First of all, in such companies, as long as the necessary approval for the transfer is not granted by the company, the ownership of the shares and all rights attached to the shares will remain with the transferor and will not pass to the transferee.
In the event that the shares are acquired by inheritance, division of inheritance, the provisions of the property regime between spouses or by compulsory execution, the ownership of the shares and the rights related to the assets arising therefrom shall immediately pass to the transferee, whereas the rights to participate in the general assembly and voting rights shall pass to the transferee only upon the approval of the company.
Approval shall be deemed to have been granted if the Company has not rejected the request for approval within three months from the date of receipt or if the rejection is unjustified.
So, for which reasons may the company refuse to approve the transfer in closed joint stock companies? This issue is regulated under Article 493 of the Turkish Commercial Code. According to the relevant provision; "The Company may refuse the request for approval by claiming an important reason stipulated in the articles of association, or by offering the transferor to purchase the shares for its own account, or for the account of other shareholders or third parties, at their actual value at the time of application.
The provisions of the articles of association regarding the composition of the shareholders' circle shall constitute an important reason if they justify the refusal of approval in terms of the company's field of business or the economic independence of the business. Furthermore, the company may refuse to register the transfer in the share register if the transferee does not expressly declare that he has acquired the shares on his own behalf and account.
If the shares have been acquired by inheritance, division of inheritance, provisions of the property regime between spouses or by compulsory execution, the company may refuse to give its consent to the person acquiring the shares only if he proposes to acquire the shares at their real value.
The transferee may request the determination of the real value of the shares from the commercial court of first instance in the place where the headquarters of the company is located; in this case, the court shall take the value of the company on the date closest to the date of the decision as basis. Valuation expenses shall be borne by the company.
If the transferee does not reject this price within one month from the date of learning the real value, it shall be deemed to have accepted the company's takeover proposal."
It should be noted that the above-mentioned reasons for refusal should be stipulated in the articles of association of the company in order to prevent the transfer of registered shares.
3.2. Registered Shares Listed on the Stock Exchange (in Listed Joint Stock Companies)
According to Article 48 of the Communiqué on Shares, "Shares to be issued by companies whose shares are traded on the stock exchange and securities similar to shares to be issued by companies must be issued in dematerialized form in electronic environment before the Central Registry Agency and the rights related to them must be monitored on the basis of right holders."
In the event that listed registered shares are sold on the stock exchange, the Central Registry Agency notifies the company of the identity of the transferor and the number of shares sold in accordance with the regulations of the Capital Markets Board or provides the company with technical access to this information. When listed registered shares are purchased in the stock exchange, the rights arising from the shares pass to the transferee upon the transfer of the shares. In the event that listed registered shares are purchased outside the stock exchange, such rights do not immediately and automatically pass to the transferee. In order for the transfer to be recognized by the company, the transferee must apply to the company. In this case, the transferee will not be able to exercise the shareholding rights arising from the shares, such as the right to participate in the general assembly and the right to vote, and other rights related to voting rights, until the transfer is recognized by the company. The Law stipulates a certain period of time for the company to approve the share transfer. Accordingly, if the company does not reject the request of the transferee to be recognized as a shareholder within twenty days from the date of receipt of the request, the transferee shall be deemed to be recognized as a shareholder.
"The transferees who have not yet been recognized by the Company shall be entered in the share ledger as shareholders without voting rights after the rights have passed. Such shares cannot be represented at the general assembly."
Article 497 of the Turkish Commercial Code regulates the reasons for which the transfer of registered shares of public joint stock companies may not be accepted by the company. These reasons, which are regulated in a much more limited manner compared to the reasons for refusal in closed joint stock companies, are as follows;
"The Company may refuse to recognize a person who acquires listed registered shares as a shareholder only if the articles of association stipulate a limit on the number of registered shares that may be acquired, based on the share capital and expressed as a percentage, at which the acquirer shall be recognized as a shareholder, and this limit is exceeded.
Furthermore, if the transferee does not explicitly declare that he/she has acquired the shares on his/her own behalf and account, the company may refuse to register the shares in the share register.
In cases where listed registered shares are acquired by inheritance, division of inheritance, provisions of the property regime between spouses or by forceful execution, the transferee cannot be denied the title of shareholder."
As can be seen, the company may reject the transfer of registered shares in public joint stock companies only if the articles of association stipulates a certain capital percentage limit and this percentage is exceeded by the transferee. Another reason for rejection is the failure of the transferee to clearly declare that he/she acquired the shares on his/her own behalf and account.
If the share transfer is not approved for any other unlawful reason other than those mentioned above, the company shall be obliged to recognize the voting rights and related rights to the transferee as of the date of finalization of the court decision. The company is also obliged to compensate the losses incurred by the transferee due to the refusal, unless the company can prove that no fault can be attributed to it.
Conclusion
Different types of problems are encountered in the transfer of joint stock company shares depending on whether the company is publicly traded or closed. Problems, lawsuits and disputes arise due to not being informed about the situations that cause the transfer to be deemed legally invalid, not checking the articles of association of the company and the agreement between the former shareholder and the company regarding the formation of the share certificate before the share transfer, not being informed whether the share price has been fully paid, not completing the necessary procedure for the transfer to be recorded in the share register or not notifying the central registry institution of the share transfers that need to be notified. As Solmaz Law and Consultancy team, we provide legal support to our clients regarding the transfer of shares of joint stock companies and help them to realize the transfer smoothly. At the same time, you can request legal assistance from our team, which has experience in performance and compensation lawsuits that may be filed if the share transfer is invalid for some reason.
References
- Mehmet BAHTİYAR, (2014), Partnership Law, Beta YAYINCILIK, S.290-299.
- Soner ALTAŞ, (2019), Joint Stock Companies According to the Turkish Commercial Code, Seçkin YAYINCILIK, pp.477-505.
- Law No. 7262 on the Prevention of Financing the Proliferation of Weapons of Mass Destruction.
- Capital Markets Law.
- Turkish Commercial Code.
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.